On August 26th, the Chinese e-commerce platform Pinduoduo (PDD Holdings) released its financial report, revealing that its second-quarter revenue fell below market expectations. This caused a sharp 29% drop in its stock price, marking the largest decline in history and sending its market value plunging by $55 billion. Its competitors Alibaba and JD.com also experienced about a 5% drop in their stock prices on the Hong Kong stock market.
Pinduoduo’s revenue decline surprised investors because the platform has long been seen as a major beneficiary of China’s “downgrading consumption” trend.
By offering heavily discounted and group-buying deals on a variety of goods, Pinduoduo quickly attracted budget-conscious consumers during a period of economic slowdown in China. However, the platform’s “internal circulation” model faced challenges as the overall economic environment weakened.
During the financial report release, Pinduoduo’s Chairman and Co-CEO, Chen Lei, mentioned at least eight times that with the slowdown in economic growth, a decrease in revenue and profits was “inevitable.”
Analysts from Bloomberg reported that the decline in Pinduoduo’s sales and profits serves as a “danger signal” for the Chinese economy. The report highlighted various recent warning signs in the Chinese economy, such as the closure of dozens of stores by Din Tai Fung in northern China and a 14% revenue drop for Starbucks in mainland China. Despite consumer preference for low-priced goods, the unexpected fall in Pinduoduo’s sales and profits stood out.
After a brief rebound in consumer spending following the relaxation of COVID-19 restrictions last year, Chinese consumers are now facing a challenging environment with layoffs, pay cuts, and plummeting housing prices. This has led to a cautious consumer sentiment and intensified price wars across various industries, contributing to a sluggish overall consumption performance in China.
According to Bloomberg, China’s retail sales grew by just over 3% in the first seven months of 2024, significantly lower than the over 8% growth rate before the pandemic.
A survey by the People’s Bank of China in the second quarter revealed that Chinese residents’ confidence in future income hit its lowest level since the end of 2022, a period marked by severe lockdown measures. Nearly half of the respondents indicated that the employment situation was “severe and difficult,” the highest proportion since the end of 2022. Additionally, close to two-thirds of respondents expressed a desire to increase savings, nearing a historical high.
In recent years, the Beijing authorities have tightened social control measures across various sectors, targeting real estate, the internet, and education industries. They have also implemented policies to suppress foreign enterprises, leading to an accelerated exodus of foreign capital and the closure of private enterprises. This shift towards favoring state-owned enterprises and tightening control over the financial sector and private businesses has resulted in a loss of vitality in the private sector, increased unemployment, subdued consumer confidence, and dampened economic growth.
While the authorities crackdown on spontaneous economic development in the private sector, they have been advocating for a so-called “CCP-style modernization,” aiming to develop new productive forces and become a powerhouse of industrial technology, deviating from the Western economic development model.
In response to these developments, Yu Weixiong, an economist from the Anderson School of Management at the University of California, Los Angeles, pointed out that excessive government investments have distorted the economic structure, diverting resources towards new productive forces at the expense of welfare for the general population. This has created a distorted scenario where high taxes and social security payments leave people unable to consume, leading to weak domestic demand.
Yu Weixiong further analyzed that households have also engaged in excessive investment in the past, resulting in significant asset growth but also a substantial increase in debt. While asset values are now shrinking due to bursting bubbles, the debt remains, necessitating a deleveraging process where people must cut back on spending and investments out of caution.
He emphasized that cash handouts and consumer vouchers may provide short-term stimulus to the economy but would not address the underlying issues, eventually leading the economy back to a state of weakness and malaise once the stimulus is exhausted.