Listless Domestic Consumption Raises Economic Alarm In China

The Chinese have stopped spending like in the past. Beijing does not acknowledge it, but that is its biggest worry today. Since the government lifted the Covid restrictions, consumption patterns have not returned to normal, signaling that contrary to claims, economic recovery is sluggish.

The biggest indicator of consumer lethargy so far is the mood during China’s midyear shopping festival called “618”. The event beginning June 18 brought retailers less cheer than usual as customers grew more frugal in the face of stagnant incomes and a tepid economy.

Originally a one-day event held on June 18, 618 is one of the two major online shopping seasons in China. But Nikkei Asia reported that with household finances still reeling from years of Covid restrictions, youth unemployment at a record high and the all-important property sector on shaky ground, shoppers from across the country said that no matter how hard e-commerce platforms tried to persuade them to spend, most of them were not tempted.

Major Chinese e-commerce platforms have kept quiet on the gross merchandise volume (GMV) figures for the month-long 618 shopping festival, a key indicator of success in years past. JD, China’s biggest e-retailer, said the event “exceeded expectations and set a new record,” while Alibaba’s e-commerce group said it saw users’ willingness to spend more time browsing on Taobao as their “greatest achievement” from this year’s festival.

However, third-party data provider Syntun said total sales during 618 from Tmall, JD, and Pinduoduo increased 5.4% from a year prior to RMB 614.3 billion ($85.6 billion), signaling that China’s consumption growth is on a slower pace than expected, as consumers spend their money more cautiously.

JD recorded an overall transaction volume of RMB 379.3 billion during last year’s 618 festival. However, its annual growth of 10.3% was a new low, slowing from the previous year’s 27.7% increase.

Everybody in the business agrees that low cost was a major theme emphasized by e-commerce platforms during this 618, as businesses offer discounts to boost sales. A survey conducted by the media outlet Southern Metropolis Daily also revealed that consumers have varied ideas of what constitutes low cost. Close to 60% of respondents believe that it refers to products with ultimate cost-effectiveness, where the brand, quality, or after-sale services are superior despite the product having a comparable price. One-third of respondents consider it the lowest price for the same item across all platforms, while 11.5% perceive it as products priced at an absolute minimum, such as goods costing RMB 9.9.

The consumer interest, or the lack of it, in the national context looks like this:   Chinese retail sales grew by 12.7% year-on-year in May, according to data released by the National Bureau of Statistics, lower than the expected 13.6% and also lower than April’s 18.4%.

Even now, most of the e-commerce platforms are not expected to disclose their GMV, a term widely used in the sector as an indicator of revenue. For the first time ever, neither Alibaba nor JD.com last year disclosed GMV during Singles’ Day in November, a move many observers took as a sign that the golden era of the country’s shopping extravaganzas might be over.

This year Alibaba, which owns the Tmall and Taobao online marketplaces, has even warned data companies about the “consequences” of widely distributing its GMV, multiple data firms told Nikkei Asia. Some said Tmall has “greatly increased” its anti-web-scraping efforts. “It looks like this year’s sales numbers are exceptionally sensitive,” one of the data companies said.

Many economists see weak consumption as the main drag on the Chinese economy, even though there is money to spend. But why is this lack of consumer interest? Economists explain that household deposits are at historic highs in China today and that means people are unwilling to deploy the money in their bank accounts into consumption or into property purchases. That is considered a classical lack of confidence, not only in retail sales, but in all aspects of the economy.

China has been trying to shift from growth driven by exports and property investments to consumption-led growth, but domestic consumption has slowed over the past three years. As external demand continues to dip and geopolitical tensions intensify, it is more important than ever for China to boost domestic demand to maintain its growth.

The country’s economy has been gradually recovering this year, but that is based on a very low base as dozens of cities, particularly financial hub Shanghai, were under strict, lengthy lockdowns last year. The recovery is also uneven, as only the service sector’s 5.4% growth outpaced GDP expansion in the first quarter. More bad news was around the corner qwhen China posted disappointing economic data for May, showing youth unemployment reaching a record high and retail sales below expectations.

Consumer confidence will improve when home finances improve and that will happen when unemployment figures lower. An uncertain job market is not making the picture any brighter. Beijing’s two-year crackdown on the technology sector, coupled with the impact of the pandemic, led many Chinese tech giants to lay off thousands of workers and seek out cheaper labor to cut costs. Since Covid-19, income growth has permanently slowed down due to slower economic growth and a pessimistic outlook for the coming years, which has also led to a decline in consumption since it is closely tied to income. Job insecurity has also lowered people’s willingness to invest in housing or splurge on daily consumption.

In China, adding to the problems, youth unemployment has risen to a record peak of over 20%, meaning 6.5 million people aged between 16 and 24 in the country are jobless. Many job seekers have turned to gig work to make ends meet. The number of registered riders at China’s largest food delivery platform, Meituan, surged by 1 million to 6.24 million in 2022, while it increased just 570,000 in 2021 and 710,000 in 2020, according to the company’s corporate social responsibility reports.

The number of registered ride-hailing drivers has also drastically increased. At the end of April, there were 5.41 million registered drivers, a jump of 60% from two years ago. Demand for rides, however, has shown little, if any, growth during the same period.

China is targeting GDP growth of “around 5%” this year. Yao Yang, professor of economics at Peking University says to reach a potential growth rate of 5.5%, consumption would have to expand at least 6.36%, which is by no means an easy task. Even boosting consumer confidence and stabilizing the property sector may not be enough to generate that level of domestic consumption, Yao said in a conversation with the media earlier this year.

It’s not a question of whether there is enough money being pumped into the economy to fuel the recovery, but instead: Where is that money going and why aren’t people availing themselves of more credit?