In June, the consumer data of four first-tier cities in China showed a “cliff-like” decline, with Shanghai even experiencing a year-on-year decrease of 9.4%. The growth rate from January to July has also been sliding. Experts analyzed the multiple reasons for the drop in consumption and believe that the complex factors of China’s economic downturn and insufficient domestic demand have led to this situation. The authorities have not come up with effective measures, leaving the situation waiting for a major political change to unfold.
According to data released by the Chinese National Bureau of Statistics on August 15, the total retail sales of consumer goods in the first seven months of the year increased by 3.5% year-on-year, a slight decrease compared to the previous months. From March onwards, there has been pressure on the growth of total retail sales. In April and June, the year-on-year growth rates were at 2.3% and 2% respectively, reaching new lows since the beginning of 2023. The growth rate in July was 2.7%. The first-tier cities such as Beijing, Shanghai, Guangzhou, and Shenzhen saw a more noticeable decline in growth rates, with some even experiencing negative growth in the first half of the year.
Data from Tianfeng Securities showed a drastic decline in consumer data in Shanghai, Beijing, Guangzhou, and Shenzhen in June. The year-on-year growth rates in total retail sales for June in these four first-tier cities decreased by 11%, 12.8%, 10.2%, and 3.2% respectively, reaching -9.4%, -6.3%, -9.3%, and -2.2%.
China problem expert Wang He mentioned to Da Ji Yuan that Beijing, Shanghai, Guangzhou, and Shenzhen serve as an indicator of Chinese consumption trends, influencing and driving overall consumption in China. The sharp decline in consumption in these cities indicates a collapse in people’s confidence in China’s economic prospects.
There is a mention of consumption differentiation, where Guizhou saw an increase in total retail sales compared to 2019, while provinces like Hunan, Henan, and Sichuan had higher growth rates in total retail sales in the first half of 2024 than the national average. However, reports cited by Shenyin & Wanguo Securities suggest that the discrepancy in data between eastern and western regions is due to varying impacts from the real estate industry’s fluctuations, emphasizing the significant role of first-tier cities in consumption trends.
Despite the relaxation of restrictions since the end of 2022, the Chinese economy has not shown signs of recovery. The 300 measures announced by the Chinese Communist Party at the Third Plenum last month to “deepen reforms” did not have the expected effect. The stock market continued to decline, with the Shanghai Composite Index falling by 0.93% on August 20, the Shenzhen Component Index by 1.24%, and the ChiNext Index by 1.34%, hitting new lows.
The data released by the Chinese National Bureau of Statistics in July indicated a 18.6% year-on-year decrease in the sales area of newly-built commercial residential buildings and a nearly one-fourth decline (24.3%) in sales volume. Consumption of large items like cars and jewelry is weakening. In July, the youth unemployment rate rose to the highest level this year at 17.1%. The urban survey unemployment rate in July rose to 5.2%, reaching a four-month high.
However, the Chinese official data has been criticized for concealing the real situation. For example, after the youth unemployment rate for 16 to 24-year-olds rose to 21.3% in June last year, the authorities stopped publishing the data, only resuming in January this year while excluding students from the unemployment rate figures. The urban unemployment rate under the Chinese Communist Party only accounts for urban populations and does not consider the significant unemployed rural population.
At the July meeting of the Chinese Communist Party’s Politburo, emphasis was placed on using “service consumption as an important lever for expanding and upgrading consumption,” supporting consumption in areas including culture and tourism, elderly care, childcare, and housekeeping. On August 3, the Chinese State Council issued the “Opinions on Promoting the High-Quality Development of Service Consumption,” outlining 20 key tasks across six areas.
However, mainland internet users are overwhelmingly cynical, expressing sentiments such as, “Do the common people have money?”,”Hold onto your wallets and get by, where is the money supposed to come from?”,”When the sky falls down, rely on your mouth to hold it up.”,”Why does it feel like targeting the wealthy?”,”Start by setting the right expectations.”,”Do we need you to teach us about consumption? The key issue is lack of money.”
Chinese Premier Li Keqiang stated in a State Council meeting on August 16 that efforts will be made to “greatly strengthen the sustained rebound and improvement trend of the economy” and “further expand domestic demand, focusing on boosting consumption”.
Wang He explained to Da Ji Yuan that China’s economic and political issues, as well as domestic and international issues, are intertwined, with the current economic situation and people’s diminishing confidence in the future interconnected. The policies currently in place are insufficient to address the problems. He mentioned the 4 trillion yuan stimulus package implemented by the Chinese Communist Party in 2008 to rescue the economy, highlighting the internal divisions within the Party and the lack of a comprehensive solution.
Zhang Liqun, a researcher at the Development Research Center of the State Council, told local media that due to declining employment and income expectations, residents are becoming increasingly cautious in their spending. The declining consumption growth in first-tier cities indicates a significant contraction in market-driven demand.
As China’s economy continues to decline, the term “consumption downgrade” has become popular since last year.
According to reports from Caixin on June 24, a large Chinese food and beverage chain featured by Laofuzi Lamian adjusted its menu prices downwards by around 30%.
Economic Daily reported on August 6 that in recent times, many supermarkets in cities like Beijing, Guangzhou, Wuhan, and Changsha have opened “convenience canteens” where the average consumption per person is around 20 yuan, with some supermarkets introducing a self-service dining model.
Economic Observation Network reported that a major French agricultural multinational company expressed that it noticed a “clear downgrade in high-quality coffee consumption among Chinese people, especially the younger generation”.
Simultaneously, since the onset of the pandemic, calls for the government to provide money and vouchers are frequent, with conflicting opinions on both sides. Recently, economist Xiang Songzuo suggested in an interview that people are not consuming because they lack money, suggesting issuing 10 trillion yuan in consumption vouchers to the public.
Huang Yiping, the Dean of the National Development Institute at Peking University, previously suggested a change in the policy mindset of “emphasis on investment, neglecting consumption” in the short term. He advocated for implementing fiscal measures that support consumption growth, including allowing rural migrant workers to settle in cities and directly providing money to the people.
However, some Communist Party experts caution against large-scale cash distribution. They argue that if individuals become accustomed to receiving money without working, it could quickly lead to inflationary risks, exacerbating difficulties for businesses in terms of manpower.
As of now, China has not adopted direct measures like some European and American countries in providing “universal cash” to the population, but some local governments have initiated multiple rounds of issuing consumption vouchers.
Qiu Wanjun, a finance and finance professor at Northeastern University in Boston, USA, stated that people’s willingness to consume is not solely determined by whether they have money or not but by several factors.
“The first is confidence in future economic prospects. Currently, some Chinese people have money but are hesitant to spend it, opting to save instead. This reluctance to consume is due to lack of confidence in the economic outlook.”
Beijing’s Bureau of Statistics data indicated that in the second quarter of the year, the consumer confidence index in Beijing was 105.9, hitting a new low since the first quarter of 2017, falling below the 106.3 in the fourth quarter of 2022.
Qiu Wanjun explained that the second reason for the decline in consumption is that many people indeed lack money, mainly due to decreasing disposable income. With a bleak economic outlook, business intentions to hire decline, leading to an inability to guarantee wages.
The third reason lies in the less-than-ideal overall economic recovery in first-tier cities after the pandemic, contributing to a decline in people’s willingness to consume, primarily due to a weak job market.
The final reason is that China is facing a situation opposite to that of European and American countries – while those countries are experiencing inflation, China is dealing with deflation. Qiu Wanjun noted that with a long-term overall decline in price levels in China, consumers are reluctant to spend as they anticipate lower prices in the future, and investors hesitate due to poor expected investment returns.
“A continuous decline in price levels can harm both consumption and investment, hence deflation in China is also a reason for the decline in consumption.”
Guotai Junan Securities analyzed the reasons for the decline in urban consumption, attributing it to a significant weakening in residents’ income growth rates and reduced social group consumption. Despite the fact that individual per capita consumption expenditure has maintained growth, the total retail sales of social groups have continued to decline, reflecting the income situations of both government entities and enterprises.
The impact of consumption fluctuations in first-tier cities on businesses has begun to surface. In the first half of the year, some service industry profits related to consumption in Beijing and Shanghai witnessed over a 60% sharp decline.
On July 10, Deng Jinbing, Deputy Director of the Service Industry Department of the Shanghai Municipal Commerce Commission, admitted that this year has seen increased pressure on the catering industry in Shanghai due to volatile consumer market confidence and rising operating costs.
Data from Qichacha revealed that in the first five months, the number of new registered catering enterprises in Beijing, Shanghai, Guangzhou, and Shenzhen decreased by 5.8% year-on-year to 53,000, while the number of deregistered enterprises increased by 3.7% year-on-year to 31,000.
According to Zhang Yansheng, a researcher at the China Center for Economic Research, if the economic growth rate in the second half of the year fails to reach 5%, it would indicate that China has not yet restored to the target range of economic operations since 2020.
Qiu Wanjun told Da Ji Yuan that China’s economic data statistics have long been opaque, and the calculation of GDP differs from some international methods. China mainly calculates from the production side, while Western countries calculate from the consumption side, which better reflects the social welfare significance.
He pointed out that Western countries operate under a free economy where private sector force surpasses government power, with private consumption in the United States accounting for about 68% whereas in China it is only around 39%. “Ultimately, we need to start with the entire market system to provide a stronger incentive for people to consume and invest.”
Wang He highlighted that in the past, China relied on investment demand for domestic consumption. However, due to private enterprises distancing themselves from the Communist Party, declining incomes of private companies, and everyone wanting to jump ship, the Party now relies on government investments. Nevertheless, with high local debt, government investments face challenges. The severe lack of domestic demand leads to severe overcapacity, exacerbating the situation with foreign countries dumping products, causing even worse employment and wage declines domestically.
“The current problems in the Chinese economy are a mix of structural, cyclical, and external factors. There is widespread dissatisfaction in society, with everyone awaiting a significant change in the Communist regime,” he said.