Commentary on Political Economy

Sunday 11 February 2024

STARVE HAN CHINESE RATS TO DEATH! NO CHEESE! NO WATER!

China’s shoppers tighten belts even as prices fall

Consumer caution presents challenge for policymakers’ efforts to maintain growth

THOMAS HALE AND WANG XUEQIAO — SHANGHAI NIAN LIU — BEIJING ANDY LIN — HONG KONG · Feb 12, 2024


Chinese electric vehicle prices are tumbling, but 38-year-old Beijinger Rio Liu is loath to part with cash for the new car he badly wants for his young family. For a start, he needs to sell his current car, but second-hand prices are falling too. “This puts me in an awkward situation,” he said.

Consumer prices in the country have been in deflation for the past four months, falling at their fastest annual rate in 15 years in January. Businesses selling everything from cosmetics to electrical goods are offering discounts. Car prices are falling at their fastest rate in 22 months.

Falling prices underline the challenges for policymakers seeking to revive investor confidence in the world’s second-largest economy. While growth of 5.2 per cent in 2023 benefited from a low base effect the previous year because of the pandemic, consumers will need to play a stronger role this year if the economy is to grow again at the same rate.

But with the property market, historically a core driver of confidence, still under pressure, consumer caution has persisted even as people celebrated Chinese new year, traditionally a period of big spending. Falling prices are not automatically encouraging people to spend.

“Theoretically low prices should increase purchasing power of consumers, but that hasn’t really been the case,” said Louise Loo, lead economist at Oxford Economics. “We think the reason is because the deflationary mindset has really been quite entrenched.”

She added: “I think this is the start of a pretty structural trend. People have become a lot more precautionary . . . They think a lot harder about how they want to spend an additional dollar of income.”

Official data showed retail sales rose 7.4 per cent in December, albeit against a low base in December 2022 when the pandemic swept across the country. Over the full year, affected by similar base effects from lockdowns, retail sales rose 7.2 per cent.

A Morgan Stanley consumer survey for December, published in January, found just over half of respondents expected the economy to improve in the next six months.

But it also noted that 76 per cent of consumers have made spending cuts to at least one category in the past six months, and that across all categories, consumers were downgrading to cheaper brands more often than they were upgrading to more expensive ones.

A “lack of income growth” was behind low consumption, suggested Fred Neumann, co-head of Asian Economics at HSBC.

The Morgan Stanley survey showed that only 45 per cent of consumers expected household finances to improve over the next six months, the joint-lowest level in the past year.

Car sales, which rose 12 per cent over 2023, are one sign of lower prices supporting demand, although Tao Lin, vicepresident of Tesla China, said the automotive data had been “volatile”.

BYD reduced prices on its Tang model by Rmb10,000 ($1,400) late last year to Rmb249,800 after surpassing 3mn in annual auto sales. Tesla, meanwhile, has cut its Model 3 by Rmb15,500 to Rmb245,900.

In the north of Shanghai, an ecommerce company specialising in luxury goods said it was “no longer a sellers’ market”.

The company, which asked to remain anonymous, added that Tmall, the online platform it works with, had repeatedly emphasised the need for them to be “price competitive” in 2024. In its adverts, Tmall says it offers the “lowest prices online”.

Across major brands in China, genuine falls in prices can be difficult to distinguish from a constant marketing schedule of discounts and deals.

Constance Zhou, 31, who lives and works in Beijing, says there had been a “notable decline” in new clothing items online priced in the higher range.

Yaling Jiang, an analyst of consumer markets, said that some price cuts, such as an Apple discount on new phones, were just “regular marketing”.

But she added the “premium that Chinese consumers are willing to accept is going down”, in part because savvier domestic buyers had “a higher understanding of the manufacturing process” and China’s status as the world’s factory.

After recently ordering through an online discount from one of her favourite Shanghai restaurants, Jiang noticed that the usual beef had been replaced with feiniu, a much cheaper substitute used in hotpot dishes. “For pho, that’s not acceptable,” she said.

In Beijing, meanwhile, Rio Liu has moved towards a “more affordable way of living”. He used to buy steak a few times a week but now limits purchases to once a month, and while he is still watching car prices, his purchase plans are on hold for now.

“Everyone is talking about consumption downgrading now,” said Liu. “All goods are facing this challenge.”

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