With the continued weak consumer demand, various industries in China are facing increasingly fierce price wars, forcing companies to boost sales through price cuts and promotions. Amid the softening Chinese economy and ongoing intense competition domestically, China is facing the challenge of deflation.
According to data released by the National Bureau of Statistics of China on July 9, in the first half of this year, the national consumer price index dropped by 0.1% compared to the same period last year; the producer price index for industrial products fell by 2.8%, and the purchase price index for industrial producers dropped by 2.9%.
CNBC reported on September 9 that due to the weak economy, Chinese consumers and businesses are reducing travel, banquets, and activities. The Beiyuan Hotel in Beijing sets up stalls at night to offer dishes to passersby. Chef Wang prepares specialty fried pigeons by the roadside.
“We used to sell fried pigeons in the hotel restaurant, and could only sell sixty to seventy a day,” Chef Wang told CNBC. “Now we can sell around 200 of them.”
However, these fried pigeons are being sold at a lower price now. Previously priced at $8 per pigeon, they are now being sold for $5.3 each.
The decline in prices is a problem facing the Chinese economy. Meanwhile, consumers, filled with uncertainty about the future, are continuously seeking more affordable goods.
On his way home from work, Wang Qiang bought a hearty dinner at Beiyuan, including duck neck, duck wings, and buns, costing slightly over $4.
“The economic situation is not very good,” he said. “The food is clean and of good quality.”
Another factor putting pressure on Chinese goods to lower prices and further pushing the economy into deflation is the excess capacity in various sectors, from electric vehicles, solar panels to takeaway services, leading to intense competition or fierce price wars in China.
On July 11, Alicia Garcia Herrero, Chief Economist for the Asia-Pacific region at Natixis, spoke at a webinar, highlighting the situation of 2,500 listed Chinese companies researched by Natixis, showing that as trading volume increases, the value is being pressured by deflation.
She added that these companies may seem dominant in the market, but in reality, they are paying a high price for it, as they are unable to generate the necessary income to continue operating.
Takeaway services are one of the most fiercely competitive fields. Leading the Chinese market, Meituan is facing intense competition from Alibaba and JD.com. Both companies are offering discount coupons to compete, pushing down prices, resulting in a significant decline in profits and a substantial increase in marketing costs for all three. In the second quarter of this year, JD.com, Alibaba, and Meituan earned about 26.4 billion RMB less year-on-year.
Goldman Sachs predicts that within the next 12 months from July to June next year, Alibaba’s takeaway business will lose 41 billion yuan, JD.com will lose 26 billion yuan, and Meituan’s EBIT will decrease by 25 billion yuan.
Although the “internal competition” makes consumer prices lower, it also intensifies concerns about the economy falling into a vicious deflationary cycle, which will force companies to lay off more employees.
The Communist Party will announce the Consumer Price Index and Producer Price Index data for August on Wednesday. Goldman Sachs predicts that wholesale price inflation will remain in “deep negative growth,” with the producer price index down by 2.9% year-on-year. The bank believes that the Consumer Price Index will see a “modest negative growth,” down by 0.2% year-on-year.
In the environment of deflation, consumer patterns are changing. There is currently high demand for second-hand luxury goods, so much so that the online second-hand store “Zhuanzhuan” opened a physical store in downtown Beijing this summer.
For Hao Wenli, buying new things was once unacceptable in her former life. “We hardly go to luxury stores now,” she told CNBC. “It’s hard to make money now, so why not shop at places like this (second-hand stores) to save money?”
Jianwei Xu, Senior Economist for Greater China at Natixis, warned at a webinar in July that the situation in the second half of this year could be more severe. He said, “We see that profits of manufacturing companies, in particular, are still declining.” “More families may face pressure in the second half of the year, as finding jobs will be more difficult.”