China’s consumers are spending differently after the pandemic, turning selective on quality and trading down, said Shaun Rein of China Market Research Group.
In the months after China’s reopening, Chinese consumer behavior has shifted to be more selective and domestic, said Shaun Rein, founder and managing director of China Market Research Group at Nomura’s China Investor Forum. The country is facing a crisis of confidence and not liquidity, he said, as it grapples with structural challenges including a shrinking labor force, youth unemployment and a real estate bubble that seems to have been pricked.
Four years after the pandemic, Chinese households are sitting on over $2 trillion of savings, contradicting expectations of consumer revenge spending. Consumer spending will likely remain muted, said Rein, in a conversation with Jizhou Dong, China consumer and property research analyst at Nomura. Disposable income levels have remained low because of unpaid furloughs, low lunar new year bonuses, salary cuts, and the lack of any major government stimulus between 2020 to 2022. As a result, large swathes of the population that have endured zero-Covid lockdowns have become wary and are opting to spend less.
Many consumers are instead trading down, Rein said, opting for cheaper yet higher quality local brands across food and beverage, apparel, sportswear and automotives compared to their foreign counterparts. Foreign brands that have managed to position their products correctly have won the hearts of Chinese consumers. Local travel services seem to be benefiting from domestic travelers opting for 5-star hotels within China instead of travel to Europe or outside Asia.
The government is unlikely to launch any major stimulus measures, Rein said, as the country will reach its 5% GDP growth target without such policies. Rather, the government is focused on investing in China’s middle class with the aim of long-term common prosperity. Local governments also have limited budgets to provide stimulus, so measures such as a drop in mortgage rates, tax benefits, and environmental tax breaks are helpful to rev up the economy. Rein expects economic conditions to improve by the second quarter of 2024.
Many international companies were unable to budget investment into China this year as the nation was under lockdown until the last quarter of 2022, when multinationals plan their spending for the following year, he said. He is optimistic that due to the government’s efforts to communicate with businesses around the world, it is sending a message that it’s now open for business. Still a growing market unlike some of the developed markets that have anemic growth or are slipping into recession, foreign companies are still keen to tap China for business.
Some homegrown Chinese companies have also turned overseas for expansion recently, particularly to Southeast Asia, Africa, and some parts of Europe. Companies that sell physical products such as electric vehicles will have a better chance of winning in these markets as opposed to internet or technology companies that have come in for a lot of scrutiny overseas, Rein said.
China’s seemingly high number of youth unemployment at 21.8% is not a result of a lack of jobs, Rein said. Many fresh graduates, who have spent their university years away from their families because they were either abroad and unable to return or stuck in campuses in different provinces, are choosing to take a year off to be with their families in smaller cities. Those families in turn have accumulated wealth over the past many years, and are in a position to have their children stay with them for extended periods. Spiraling property prices that have had knock-on effects on wealth have also resulted in many citizens delaying having children, in turn affecting consumer spending.
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