Sluggish GDP growth and record low retail sales is stirring doubt amongst investors and analysts on China’s consumption growth. This report takes a deep dive into the hotly debated “consumption downgrade” to find out if the Chinese are truly cutting back on costs.
The clock has struck 12 on the Chinese Cinderella story as the nation’s economic carriage seems to be turning back into a pumpkin. With China caught up in an escalating trade feud with the U.S., whilst experiencing a rocky stock market and the yuan sinking to a 10- year low against the dollar, economists are growing pessimistic, instigating sentiments of a potential “consumption downgrade”.
According to China’s latest economic data for Q3, the country reported the slowest growth since the 2008 - 2009 financial crisis at 6.5% GDP yearly growth. The consumer class seems to be curbing on their expenditures, with a weaker than expected yearly growth sales of 4%. But is this “consumption downgrade” phenomenon as worrisome as it’s made out to be?
The trend of this latest global viral challenge takes China by storm: Millennials flaunting their wealth whilst spilling out of car. This begs the question, is there really a “consumption downgrade”?
"The country reported the slowest growth since the 2008 - 2009 financial crisis at 6.5% GDP yearly growth."
Especially now, when wealth-flaunting photos of over a million Chinese people “falling out of cars whilst displaying their luxury goods”, is going viral in China, it’s hard not to grow skeptical of this hotly debated “consumption downgrade”.
TECHNOLOGY DISRUPTION OPENS AN ERA OF NEW CONSUMPTION
According to our report, using retail sales as a barometer for this downturn does not give a full picture. We found that the definition of retail sales is limited because it fails to include service consumption such as education, medical care and entertainment, that is said to have accounted for 40% of total household consumption. In fact, we found out that China is entering an era of new consumption habits. In our report, we draw upon a case study to prove that consumption downgrade is better defined as consumers opting for value-for-money options, rather than high-end products.
"We found that the definition of retail sales is limited because it fails to include service consumption."
When it comes to the consumer culture around technology, we found that the latest disruption in consumer electronics has empowered a pragmatic consumer culture. Chinese smartphone brands, which have priced themselves aggressively lower, have taken a higher market share in China, despite having similar specifications with overseas leading brands. This suggests that while the Chinese consumer culture grows conservative on spending excessively, they certainly still are spending on products that have better value rather than perceived value.
CHINA'S NEW NORMAL ECONOMY AND PRAGAMATIC CONSUMER CULTURE
Since “downgrade” isn’t entirely reflective of consumption trends, media and analysts are now terming it as a new form of consumption habits. Termed as China’s “New Normal”, the economy is expected to grow at a more moderate pace. While economists expect to see the final consumption growth slow further in 2019, household consumption expenditure is estimated to remain solid. This trend signifies a more realistic, sustainable growth trajectory, focused on a value-for-money whilst maximising quality centric approach to consumption as opposed to a surge of growth for growth’s sake.
"Household consumption expenditure is estimated to remain solid."
In fact, according to our report, as the Chinese economy realigns itself, consumption will still act as the main driver behind GDP growth which remains resilient at 6.9% in 2017 and 6.8% in the first quarter of 2018. According to the IMF, it’s projected that China’s GDP growth could overtake the U.S. by 2030.
Source: IMF staff estimate
So while there are still potential risks such as household debt that could impede on consumption growth in China, the Chinese will continue to spend, but maybe on a Huawei rather than an iPhone, or a trip to Singapore than say, Paris, or buy a Coach handbag over a Prada. Either way, the Chinese will continue spending, just smarter.