This is already showing in economic data. Online and physical retail sales expanded by 2.5% in August, far below the roughly 7% expected by economists, with the largest decreases in restaurants and catering, clothes, communication devices, and automobiles. A quick survey of the posts on the Douban group promoting thriftiness confirms that: Milk tea, lipsticks, coffee, and clothes are among the top expenditures that users say they would cut first.

Online spending was particularly weak in August, during the latest rollout out of China’s Covid-zero policy. While it surged during previous coronavirus outbreaks as more people stayed at home, that month the two-year compound growth rate of online retail sales decreased by 7.1 percentage points from July.

This could point to a long-term impact of the pandemic on consumption, according to analysts from investment bank China International Capital Corp.

Even young people, previously among the most free-spending consumers, are thinking more carefully about their wallets, Cheng Shi, the chief economist at Chinese brokerage ICBC International Securities wrote in a note last month. “Such changed spending habits and trends won’t end with the ending of the pandemic,” he added.

The Evergrande effect

Beyond the pandemic, Beijing’s crackdown on housing is also weighing heavily on the minds of Chinese consumers, for whom property accounts for around 40% of household assets, according to HSBC.  House prices are now starting to fall in some cities as authorities put more pressure on developers to deleverage for fear of a housing bubble, causing developers such as Evergrande to give heavy discounts in order to solve their liquidity crunch. This is good news for those trying to get on the housing ladder. But those with their savings tied up in property are likely to further spending with less confidence in their own economic wellbeing.

The only people who seem to remain confident enough to spend are the rich. Duty-free shops in the southern island of Hainan saw their sales surge during a seven-day national holiday earlier this month, with customers who couldn’t easily travel abroad buying luxury goods there instead.

Surveys also show Chinese luxury buyers plan to continue purchasing those items. That attitude highlights the deepening wealth gap between China’s haves and have-nots, whose recovery from the pandemic has been uneven.

China faces a tough way ahead

Chinese authorities now face the challenge of finding ways to boost consumption amid low confidence. One potential avenue for the government is to build up its social security, pension, and health insurance systems, said Lee, the economist.

Many citizens, including hundreds of millions of migrant workers, are left out or not covered comprehensively by China’s social security plan. That might be a key reason that a survey done by China’s central bank in the second quarter saw nearly half of respondents from urban households say they intend to save more. Youngsters born under China’s one-child policy, which was lifted in 2015, also feel the need to save to care for their elderly parents and prepare for when they themselves get old, wrote Cheng, the ICBC economist.

For now, expanding the social safety net isn’t an explicit part of the government’s broader solution to achieve “common prosperity,” Xi’s ideal of redistributing wealth and making the masses prosperous. But Xi has acknowledged the importance of social security as a “basic system guarantee” for improving people’s welfare broadly.

Instead, Beijing is likely to focus on value-added taxes on life necessities and increasing sales tax on luxury goods to spur consumption, according to analysts from Chinese brokerage Guosheng Securities. “To fundamentally increase consumer spending, [the government] needs to reform middle to long-term policies to increase household income,” wrote the analysts. “In some sense, the target of encouraging consumption is in line with the ‘common prosperity’ drive.”

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