China’s domestic consumers are spending less and saving more as the country experiences stagnating economic growth, rising unemployment and a folding property sector.

Since 1978, China’s GDP growth has averaged over 9% annually, and the World Bank estimates that this saw almost 800 million residents lifted out of poverty. With wealth came spending, and retail thrived alongside the wider economy.

However, a myriad of factors has plunged China’s economy into turmoil of late, and deflationary pressures mean that economic growth is slowing. It was recorded at 5.2% in 2023 and is projected to be 4.5% in 2024.

Mark Williams, chief Asia economist at Capital Economics, tells Retail Insight Network: “China’s consumers seem to be losing confidence in the economic outlook. A large share of their wealth is tied up in a housing sector that is collapsing. Income growth has slowed dramatically, and the geopolitical situation leaves the future looking a lot less bright than it used to, with Western governments putting barriers up against imports from China.”

Consumers are saving, not spending

The challenges have impacted China’s consumers, many of whom are rethinking their spending priorities. While this spells good news for discount retail, the general reluctance to spend could in time result in oversupply, the scaling back of production and, ultimately, fewer employment opportunities with less money in circulation.

Discussing how demand deflation is shaping China, Freya Beamish, chief economist at TS Lombard, tells Retail Insight Network: “The non-government sector, including consumers, will need to try to rebuild their nest eggs after the slump in property prices by savings and running surpluses. The flip side of that is that they have to be very cautious about spending, which is deflationary, hence the term demand deflation.”

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Cautious spending has created opportunities for some sectors. Food and drink retailers in China have found particular success, as consumers prioritise necessary spending. Meituan (China’s leading food delivery app) saw revenue growth of 25%, for example, while Luckin Coffee (known to be inexpensive) reported growth of 42%.

Painting a different picture, home retail continued a downward trend in 2023. Spending dropped 7.9% compared with 2022, when the Chinese economy saw a slump caused by regulations associated with the government’s zero-Covid policy.

Electricals also suffered in 2023, dropping 3.9% compared to 2022. Meanwhile, health and beauty did see growth, but it was insubstantial, increasing by only 0.006%.

The slowing of economic growth has enabled discount retailers to find success in China. PDD Holdings owns both Pinduoduo and Temu, e-commerce platforms selling low-priced products across a range of markets. Its Q1 2024 revenue was RMB86,812.1m ($11,990m), up 131% year on year. Miniso – known for selling affordable household and consumer goods – reported 26% growth for the first quarter.

The pressures of a deflationary future

Beamish considers that the government’s deflation strategy is also likely to add further pressure on China's consumers in the future.

“Instead of moving on to a new model, where they try to stimulate domestic demand, the authorities have chosen to try to solve the problem of excess supply in some parts of the economy by creating excess supply in new parts, chiefly green goods, through redirecting those excessive savings towards investment in these new sectors,” she says.

“Unfortunately, that will also depress returns, ensuring that consumers need to keep trying to save more because return on wealth is not perceived as enough to provide an adequate standard of living and the social safety net remains very thin. All of this means saving not spending and deflation not inflation.”

The fixation on saving has been prompted by the struggling property sector, which once accounted for 29% of China’s GDP. The early signs of the snowballing problem became evident when in 2021 Evergrande – China’s second-largest real estate developer – defaulted on debts of over $300bn. Since then, several other developers have defaulted, including Country Garden – another of the country’s largest.  

Property has historically been a popular investment in China, and the sector’s struggles have left consumers feeling wary about spending money on projects that won’t be delivered. For many, financial uncertainty is intensified by a general slowing of income growth, caused by zero-Covid disruptions and geopolitical strains – significant Western tariffs on electric vehicles, semiconductors and solar cells have also weakened export manufacturing activity.

“Some of this might improve a bit in the near term – income growth might pick up, and the government might be able to restore a bit of confidence,” says Williams. “But the economic fundamentals of weaker growth than many had got used to and had expected to continue don’t look likely to change. The years of breakneck expansion in consumer spending are in the past.”