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Tightfisted consumers are becoming a worry for China’s economy

In this Thursday, Nov. 29, 2018, photo, Chinese tourists walk on the Canton Road, the one-stop-shop high street of high-end brands in Hong Kong. Chinese tourists, big customers for global luxury retailers, are skittish after a year marked by cooling economic growth, a plunge in stock prices, trade tension with Washington and a soft real estate market. (AP Photo/Kin Cheung)
AP Photo/Kin Cheung
In this Thursday, Nov. 29, 2018, photo, Chinese tourists walk on the Canton Road, the one-stop-shop high street of high-end brands in Hong Kong. Chinese…

To understand the changing habits of the Chinese consumer, it’s helpful to read over a series of conversations on spending taking place on Douban, a popular Chinese social media platform. Here people discuss whether it’s shameful to buy leftover cakes, or how to save money by switching from disposable tampons to reusable menstrual cups. As the pandemic ravaged the economy and disrupted lives, the group, named “Have you downgraded consumption today?” has seen its number of users double to 300,000 in a year.

China has pegged its economic future on its spendthrift consumer class. Yet the conversations on Douban are further evidence of a troubling trend for policy makers: Consumers are becoming more thrifty.

“I used to live from paycheck to paycheck for the four years ever since I graduated from university…but the pandemic has given me a thorough sense of crisis,” wrote a user on the group. “So in 2020 I paid off all my credit card debt [and] removed all the bags that I wanted to buy from my shopping list.”

The number of posts published in the group jumped from dozens to hundreds in the months since the pandemic began, according to Chinese outlet DT Data, which attributed the increased interest towards the group to the fact that youngsters are more cautious about spending after the pandemic.

For years, China has been trying to shift away from an export- and infrastructure-driven economic model towards one focused more on domestic spending. Such a plan both aspires to the spending-driven models of Western economies, and is in line with one popular strand of economic wisdom, which sees all economic evolution being directed towards a consumer-focused economy. The latest iteration of this is president Xi Jinping’s “dual-circulation” strategy, which aims to boost domestic consumption and production to reduce China’s reliance on other countries.

But so far, China’s post-pandemic economic recovery still relies heavily on strong exports and industrial production growth. In contrast, its private consumption shrank from 38.6% in 2016 to about 37.7% of the country’s GDP last year, the lowest level in the past five years. This segment meanwhile accounts for around 61% of UK GDP, while the figure is around 69% for the US.

Although a pick-up in retail sales helped with China’s 7.9% GDP expansion in the second quarter, new Covid-19 outbreaks in July weighed on that month’s retail sales, which had a lower-than-expected growth. As China is set to release its third-quarter GDP figures next Monday (Oct. 18), all eyes will be on whether retail sales rebounded in September, and how much disruption the pandemic had brought.

The mixed story of China’s consumer power

Overall, investment in infrastructure, manufacturing, real estate, and exports have been the major drivers of China’s GDP growth in the past years. While the focus on those sectors helped to offer jobs for many of the country’s migrant and blue collar workers, they have become less sustainable in recent years. Growing local government debt and a shrinking workforce due to China’s aging population has prompted Beijing to find new engines of growth. It has pinned its hope on consumer wallets.

To be sure, China has achieved substantial progress in growing its consumer power. In 2020, China’s total retail sales reached around 39 trillion yuan ($6.3 trillion), compared to around $4 trillion for the US that year. The country remains a powerhouse for global luxury brands despite the pandemic, and it is on track to become the world’s biggest luxury market by 2025 according to Bain.

But despite that stunning growth, consumer spending is a declining contribution to China’s GDP. According to the World Bank, China’s household and government spending as a share of GDP dropped from a high of 85% in 1962 to 56% in 2019, and then 54.3% in 2020. By comparison, the figure has remained much more steady in the country’s autonomous region Hong Kong since the 1960s, reaching 79% last year, according to World Bank data.

At the same time, China’s national income has also become increasingly allocated towards the government instead of households, according to Huang Dazhi, a researcher at Chinese think tank Suning Institute of Finance. “Compared to before, for every 10,000 yuan’s national income, citizens have got less in the distribution of the money, and hence consumption is affected,” wrote Huang.

Chinese consumers are facing mounting uncertainties

In recent months, coronavirus outbreaks, plunging market returns, layoffs, and power crunches are among the factors forcing Chinese people to reassess their once rosy outlook for their own future, and reduce their spending. Most of those events are driven by unexpected policies issued by Beijing this year—its enhanced scrutiny of tech companies, for example, or its requirement that private tutoring firms suddenly become non-profits.

Amid the many worries and uncertainties, China’s middle class is abandoning its old habit of upgrading everything from cars to cosmetics. Instead, a scroll through social platforms like Douban suggests economic uncertainty and the pandemic have underscored the value of having a thrifty lifestyle.

“This year we have spent money on nothing except for our children’s education. I feel the times will be tough for the next two years,” wrote a Chinese internet user recently. The comment was in response to a post asking readers about the impact of issues at Evergrande, the beleaguered property developer which has missed interest payments on bonds due to overseas institutions. Its failure to pay out on purchases made by retail investors led to mass protests outside its headquarters in Shenzhen last month.

“‘Black swan’ events, like Evergrande, or these intermittent and sporadic threats…could add to the deterioration of [consumer] confidence,” says Todd Lee, executive director of global economics at IHS Markit. The Chinese economy, which used to expand at double-digits in the late 2000s, has seen the rate of growth halved in the last 10 years. The combination of that macro backdrop of a slowing economy with those events, if they happen more frequently, could eat into consumer confidence, he said.

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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