(Bloomberg) -- President Xi Jinping’s government is facing growing pressure to address China’s consumer spending downswing, as it becomes one of the biggest threats to global economic growth.
A key gauge of Chinese services activity that covers the retail industry was on the brink of contraction for the first time since last year in data released Wednesday. That was part of a disappointing snapshot of the economy offered in purchasing manager indexes for July, which revealed stubborn deflationary pressure even outside industries such as manufacturing.
With consumption contributing less than half of growth to China’s $17 trillion economy in the second quarter for the first time since late 2022, the prospect of a prolonged slump is resonating worldwide. The domestic spending gloom has already stung global brands from US coffee chain operator Starbucks Corp. and French beauty giant L’Oréal SA to Japan’s Fast Retailing Co., sending sales diving and weighing on stock valuations.
“Consumers pay more attention to price than quality amid a dimmed outlook for incomes,” said Zhaopeng Xing, a senior China strategist at ANZ Bank China Co Ltd., noting that trend has led to raging price wars. “The authorities have not given a clear path to add to household incomes.”
The urgency is percolating through the highest echelons of Chinese politics. Top leaders at a meeting of China’s decision-making Politburo vowed Tuesday to make boosting consumer spending a greater focus of policy for the rest of the year.
Investors are skeptical, citing a lack of detailed, forceful plans from Beijing. For now, manufacturing and exports remain crucial pillars of China’s economic recovery — even after triggering complaints from Beijing’s biggest trade partners such as the US and European Union over the country’s industrial overcapacity.
What Bloomberg Economics Says...
“Ultimately, poor sentiment is keeping households and businesses from spending and investing. Correcting this is the hardest of all challenges. To succeed, the benefits of stimulus and long-term reforms need to reach ordinary people – an imperative that the leadership has become increasingly aware of.”
Chang Shu, Chief Asia Economist, and David Qu, Economist
Read the full report here.
A housing slump that’s persisted for years is pinching household budgets and undermining confidence, prompting many Chinese to tighten their purse strings. JPMorgan Chase & Co. estimates that China’s urban middle class has around 60% of their wealth tied to real estate.
The consumer blues have left global brands grappling with sluggish demand and competition from established Chinese names that sell similar products for less.
Thriftier habits are also taking a toll on the profits, share prices and even jobs of companies that for years relied on once-flush Chinese shoppers to boost their bottom line.
“As consumers become sophisticated and more cautious on spending, the origin of brands might turn less critical in driving the business growth,” said Bloomberg Intelligence analyst Angela HanLee.
The frugality of Chinese households has forced some international companies to refine their local strategies.
“Consumer sentiment remains stubbornly weak in China, and domestic brands have been faster to adapt to changing consumer needs than foreign brands in most cases,” said Mark Tanner, managing director at marketing agency China Skinny. “Consumers are becoming increasingly price sensitive.”
Starbucks, which reported Wednesday faster-than-expected same-store sales decline in China, is seeking a local partner to help win back customers. That’s after spending $1.3 billion to buy back its domestic stores from partners President Chain Store Corp. and Uni-President Enterprises Corp. in 2017.
Meanwhile, its top Chinese competitor, Luckin Coffee Inc., performed better than expected, luring consumers who might have once flocked to Starbucks’s pricier lattes but now seek a cheaper homegrown alternative.
Starbucks isn’t the only one left in the lurch. French beauty-products giant L’Oréal posted a 2.4% sales drop for the second quarter in North Asia, which includes China. That was the fourth straight quarter of falling sales in the region, which accounts for about a quarter of L’Oréal’s revenue.
Nicolas Hieronimus, the brand’s chief executive officer, called the beauty market in mainland China “depressed.”
McDonald’s Corp. reported same-store sales decline in the second quarter in China. The burger chain’s CEO, Chris Kempczinski, pointed out in a call with analysts that China is a very competitive environment right now and the consumers there are “very, very much deal-seeking.”
The Politburo’s pledges to roll out more consumption policies sent Chinese consumer stocks soaring in Wednesday morning trading. Yet many investors were still unconvinced whether those promises would translate into concrete measures.
China has been reluctant to juice the consumer economy with measures such as nationwide cash subsidies or shopping coupons, in part due to concern over inefficiency and worries the plans could spawn corruption.
Instead, officials have rolled out a program to encourage businesses and households to upgrade to greener, smarter equipment this year, an effort similar to a “cash for clunkers” initiative seen in countries like the US.
The authorities are ramping up support for upgrading and trade-in programs, with an announcement last week that the government is earmarking 300 billion yuan ($41 billion) for the effort.
But its impact on domestic demand has yet to be felt, as China reported retail sales growing in June at the weakest monthly pace since December 2022.
“The wealth effect is under pressure in China,” said Nelson Yan, co-chief investment officer at Fosun Wealth International in Hong Kong. “Consumer downgrading is still around.”
--With assistance from Kelly Li and Zhu Lin.
©2024 Bloomberg L.P.
