Chinese consumers are moving more towards lower-price point products. The remarkable part is that they are doing this while staring down an increasingly dire economic landscape of stagnant incomes and plummeting consumer confidence. Last year, the total value of goods sold in China increased by 4.4%. At the same time, average selling prices fell 3.4% illustrating a dramatic shift in consumer spending and buying habits.
That economic backdrop is inextricably tied to China’s recent “common prosperity” rhetoric. This idea has yet to find its new consensus among the public. As monthly business surveys starting in May began to show a contraction in the labor market, the strains on consumer spending began to deepen. Rising income levels are a double-edged sword standing in the way of Chinese consumers’ willingness to spend.
According to statistics released last week, last year per capita disposable income in urban areas hit 54,188 yuan, or roughly $7,553. Since 2020, total disposable income has increased by a staggering average of 5% per year. This figure belies a more profound issue: the top 20% of earners account for half of total income and consumption, leaving the majority of households with limited purchasing power. A staggering 64% of Chinese households prefer to save money rather than spend or invest it, indicating a cautious approach to financial management amid uncertainty.
The consumer price index has come under downward pressure as well, with widespread price declines over four straight months. This has only added to a climate of low consumer confidence, which is now stuck at levels near historic lows. Consumers seem unwilling to pull the trigger on big ticket items while they wait for some kind of clearer economic signal.
With the real estate market, a key pillar of most of China’s sub-national economies, still failing arrested or resolved in its recovery attempts. As we at the Center have recently reported, young people are experiencing a pandemic economic crisis of their own. In April, the unemployment rate for young people aged 16 to 24 who are out of school reached an astronomical 15.8%. China’s official urban jobless rate also stays flat at just 5%. This reliability does virtually nothing to address fears over job security and income prospects.
Bruno Lannes, a Shanghai-based senior partner with Bain & Company’s consumer products and retail practices, remarked on the changing mindset of consumers:
“In today’s world they are more rational. They know what they want.”
Consumers are demonstrating a clear bet on caution and deliberate caution with their spending. They are now more focused on goods that are necessities and cheap substitutes for luxuries.
Economist Jeremy Stevens from Standard Bank noted that while policy support for low-income groups is well-intentioned, it remains inadequate without substantial structural wage reform. He explained that recent institutional realignments and policy shifts have only added to the uncertainty in the market:
“Policy support for low-income groups, while well-meaning, is insufficient without structural wage reform.”
Today’s market depicts a dualistic image of China’s consumer base, one where aspirations towards innovative projects brush shoulders with fiscal conservatism. Lannes further elaborated on this trend, stating that:
“Chinese consumers were willing and able to buy any innovation, even innovations that were not that really innovations.”
The future course of China’s economy will depend on whether they can tackle these bad consumer habits and root economic causes. As households remain cautious with their finances and prioritize savings over spending, businesses may need to adapt their strategies to align with the evolving preferences of consumers.