Drew Bernstein
At the start of 2023, economic forecasters were optimistic that China would see a surge in consumer spending as the country emerged from the world’s strictest COVID-19 lockdowns. With Chinese consumers contributing more than 20% of global luxury spending in 2021 and having saved $2.6 trillion in 2022, there was widespread belief that this pent-up demand would drive robust growth in China’s GDP. However, as the year progressed, it became evident that Chinese consumers were not splurging as expected, leaving many to question the future of China’s economy.
The Reality of China’s Consumer Market in 2023
Contrary to expectations, Chinese consumers remained cautious throughout 2023. Major online shopping events like Singles’ Day, traditionally a barometer of consumer confidence, saw lackluster results. Both Alibaba and JD.com, giants in China’s e-commerce sector, did not report sales figures for the second consecutive year, with independent analysts estimating a slight decline in gross merchandise value.
Alibaba’s struggles were further highlighted when the company announced it was shelving plans to spin off its cloud services and AI unit and delaying the IPO of its Freshippo retail grocery chain due to market conditions. The company’s core e-commerce platforms, Taobao and Tmall, reported only 4% revenue growth, significantly lagging behind Amazon’s 13% growth in the same period.
JD.com also faced challenges, posting a mere 1.7% revenue growth for the third quarter. Although the company increased profitability by cutting overhead and R&D spending, the overall sentiment in China’s e-commerce market was one of saturation and declining investor confidence. Shares of both Alibaba and JD.com have fallen sharply from their January highs, reflecting a broader skepticism about the future of China’s consumer-driven economy.
The Reluctance to Spend
China’s government has long aimed to rebalance the economy by boosting consumer spending, a critical component for sustainable growth. In 2021, consumption accounted for just 54% of China’s GDP, compared to over 80% in the United States. However, the consumer’s share of the economy has been declining since 2019, and despite a projected 5% growth in China’s economy this year, domestic consumption remains weak.
One significant factor behind this reluctance is the decline in real estate prices, which has eroded the wealth of China’s urban middle class. Real estate has traditionally been the primary source of wealth for many Chinese households, but with youth unemployment exceeding 20% and the overall population starting to contract, the future of these investments is uncertain.
As a result, Chinese consumers are tightening their belts, opting for more affordable alternatives and reducing discretionary spending. This trend is evident in their preference for domestic travel over international vacations and the shift from high-end coffee chains like Starbucks to more affordable options like Luckin Coffee.
The Path to Restoring Consumer Confidence
Restoring consumer confidence is crucial for the future of China’s economy. One of the most promising developments in this regard was President Xi Jinping’s summit in San Francisco, which, while light on concrete economic agreements, showcased Xi as a leader committed to de-escalating tensions with the United States and normalizing business relations.
Following the summit, China announced a “white list” of 50 real estate developers eligible for support from state-owned banks, signaling a commitment to addressing the ongoing real estate crisis. While it will take years to resolve the issues stemming from speculative development, these steps are aimed at stabilizing the housing market and protecting homeowners who have invested in unbuilt apartments.
However, the most challenging task will be to convince China’s private sector, which plays a crucial role in job creation and economic growth, that the government fully supports its role in the economy. Historically, China’s private sector has been the driving force behind the country’s economic miracle, and its revival is essential for restoring consumer confidence and achieving long-term growth.
Conclusion
As China’s economy faces the twin challenges of cautious consumer spending and a slowing real estate market, the path forward will require significant efforts to restore confidence among consumers and the private sector. The government’s recent initiatives, such as the support for real estate developers and efforts to mend international relations, are steps in the right direction. However, the most critical element will be a clear and consistent commitment to supporting private enterprises, which hold the key to reigniting China’s economic engine.
In the words of an American president from a century ago, “The chief business of the American people is business.” This sentiment could just as easily apply to China, a nation with immense commercial potential. For China to realize its economic dreams, it must fully embrace the role of private enterprise in driving growth and innovation.
