Mark Tanner puts the property-induced consumption blues in China into a broader perspective, seeing a good chance of a pick up, and a return to higher demand

By Mark Tanner*

China’s economic growth was stronger than expected last quarter, coming in ahead of the 4.6% median forecast at 4.9%. Although this puts China on track to meet or even exceed Beijing’s 2023 growth target of 5%, it’s fair to say that China’s economy isn’t out of the woods just yet.

Chinese consumers have driven the lion’s share of the rise of China’s economy this year, contributing to 83.2% of GDP growth. Consumers have been splashing out on premium products in areas that are important to them, such as health and personal care products, and products that they connect emotionally with like their pets, and the outdoors. They are also spending a larger share of their wallets on services and experiences. Yet other product categories are seeing many consumers becoming more price conscious in their decisions.

This price sensitivity is reflected in the ecommerce giants’ promotions this Singles’ Day festival. Alibaba’s Taobao Live is handing out ¥1 billion ($137m) worth of cash coupons. Tmall is giving the equivalent of a 17% discount on every ¥300 ($41) spent and is offering 15% off single item purchases for the first time. JD.com’s Singles’ Day campaign is themed "real cheap," and the platform has doubled down on its "true low price" strategy, launching ¥10 billion ($1.37b) worth of price subsidies and free shipping for a range of products priced at only ¥9.9 ($1.35).

A large contributor to more cautious Chinese consumer spending is the current state of the property market. Chinese consumers’ collective net worth grew from $7 trillion to $120 trillion between 2000 and 2020, largely on the back of property appreciation. This saw individual wealth grow almost 50% faster than the eyewatering ascent of China’s GDP over this period. It made Chinese consumers feel flush with cash and played a big part in Chinese retail spending. So it’s not surprising that the halting of appreciating property prices has directly impacted consumer sentiment. Property investment tumbled 9.1% in the first three quarters of the year.

Is this a slippery slope that spells doom for Chinese consumer spending? Not likely. There is plenty of data and forecasts to say otherwise, such as McKinsey’s 2023 China Consumer Report which expects another 71 million households could enter China’s high income bracket between 2021 and 2025. This continued rise of affluence and aspiration is represented by the growth in the number of automobiles in China, which has jumped from 340 million in mid-2020 to 430 million this year, as we noted last week.

Just 75 million of China’s 1.4 billion people live in first tier cities. Although they spend disproportionately more than most Chinese, it is the other 95% of people who will make the biggest contribution to China’s consumption growth.

Those lower-tier consumers aren’t yet all trotting down to the local Porsche dealership, Sephora store or Olé supermarket to buy premium imported goods. Many of them are being serviced by local chains selling Western-styled fast food such as Tastien and their ¥7 ($1) burgers or Luckin and a host of other coffee chains selling cheap Western-styled coffee. Those lower-priced local chains are building habit, and some of those consumers, as they grow more sophisticated, could upgrade to buying well-marketed imported goods, some may even do so abroad.

Whilst a lot of consumption in China is price sensitive at present, consumers will move on from their property-induced blues, and there’ll also be plenty more entering the fray too, many looking to buy imported goods.

*Mark Tanner is the CEO of China Skinny, a marketing consultancy in Shanghai. This article was first published here, and is re-posted with permission.