China’s domestic consumers are spending less and saving more as the country faces stagnant economic growth, rising unemployment and a collapsing real estate sector.
Since 1978, China’s GDP growth has averaged over 9% per year, and the World Bank estimates that this has lifted nearly 800 million residents out of poverty. With wealth came spending, and the retail industry boomed alongside the broader economy.
However, a host of factors have roiled China’s economy recently, and deflationary pressures are causing economic growth to slow. In 2023 it was 5.2% and in 2024 it is expected to be 4.5%.
Mark Williams, chief Asia economist at Capital Economics, explains Retail Insight Network: “Chinese consumers appear to be losing confidence in the economic prospects. Much of their wealth is tied up in a housing sector that is collapsing. Income growth has slowed dramatically and the geopolitical situation means the future looks a lot less bright than before, with Western governments putting up barriers to imports from China.”
Consumers save, don’t spend
The challenges have impacted Chinese consumers, many of whom are reconsidering their spending priorities. While this is good news for discount retailers, the general reluctance to spend could eventually result in oversupply, production cuts and, ultimately, fewer jobs because there is less money in circulation.
Freya Beamish, chief economist at TS Lombard, discusses how demand deflation is shaping China Retail Insight Network: “The non-governmental sector, including consumers, will have to try to rebuild their savings after the fall in real estate prices through savings and current surpluses. The downside of that is that they have to be very careful with their spending, which is deflationary, hence the term demand deflation.”
Prudent spending has created opportunities for some sectors. Food and beverage retailers in China have seen particular success as consumers prioritize essential spending. For example, Meituan (China’s leading food delivery app) saw 25% sales growth, while Luckin Coffee (known for being cheap) reported 42% growth.
A different picture paints that home sales continued the downward trend in 2023. Spending fell 7.9% compared to 2022, when China’s economy saw a slump due to regulations related to the government’s zero-Covid policy.
The electricity sector also suffered a decline of 3.9% in 2023 compared to 2022. Meanwhile, health and beauty saw growth, but it was not substantial and increased by only 0.006%.
The slowdown in economic growth has allowed discount retailers to find success in China. PDD Holdings owns both Pinduoduo and Temu, e-commerce platforms that sell low-priced products in various markets. Revenue in the first quarter of 2024 was RMB86,812.1 million ($11,990 million), up 131% year-on-year. Miniso – known for selling affordable home and consumer goods – reported 26% growth for the first quarter.
The pressure of a deflationary future
Beamish believes the government’s deflation strategy is also likely to further increase pressure on Chinese consumers in the future.
“Rather than switching to a new model of trying to stimulate domestic demand, the authorities have chosen to solve the problem of oversupply in some parts of the economy by creating oversupply in new parts, especially green goods, through to redirect those excessive savings into investments in these new sectors,” she says.
“Unfortunately, that will also depress returns, forcing consumers to continue trying to save more as returns on assets are not considered sufficient to provide an adequate standard of living and the social safety net remains very thin. All this means saving and not spending, and deflation not inflation.”
The fixation on savings has been driven by the struggling real estate sector, which once accounted for 29% of China’s GDP. The first signs of the snowball problem became apparent when Evergrande – China’s second-largest real estate developer – defaulted in 2021 on debts of more than $300 billion. Since then, several other developers have defaulted, including Country Garden – also one of the largest in the country.
Real estate has traditionally been a popular investment in China, and struggles in the sector have made consumers wary of spending money on projects that won’t be delivered. For many, financial uncertainty is compounded by a general slowdown in income growth caused by zero-Covid disruptions and geopolitical tensions – significant Western tariffs on electric vehicles, semiconductors and solar cells have also weakened export manufacturing activity.
“Some of this could improve a bit in the short term – income growth could pick up, and the government might be able to restore a little bit of confidence,” Williams says. “But it does not seem likely that the economic fundamentals of weaker growth than many were used to and expected to continue will change. The years of breakneck growth in consumer spending are a thing of the past.”
“Why are Chinese consumers spending less?” was originally created and published by Retail Insight Network, a brand owned by GlobalData.
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