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China's slow consumption recovery upset by wary low-income households

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09/23/2020 | 09:08pm EDT
People walk past a department store of the Wangfuijing Group in Beijing

Months after China brought its coronavirus epidemic under control, its consumers are slowly opening their wallets again - but the hard days of lockdowns still weigh on many shellshocked lower-income households, who prefer to hold on to their cash.

While China's recovery https://in.reuters.com/article/china-economy-gdp/wrapup-5-chinas-economy-rebounds-after-steep-slump-weak-demand-u-s-tensions-raise-risks-idINL3N2EM318 from a record first quarter contraction is well ahead of most other countries, it has been uneven. Lingering weakness in consumption could complicate President Xi Jinping's push to curb the country's dependence on volatile overseas markets.

Factories rebounded relatively quickly from paralysing lockdowns, but consumer confidence has picked up only gradually in the world's second-largest economy.

It took until August before retail sales finally returned to growth, rising 0.5% on-year. Sales for the first eight months were 8.6% lower than the same period last year.

But while spending on luxury goods like Prada bags quickly shook off the virus shock, consumption of daily necessities and services is recovering more slowly. Extra caution from lower-income households is a key reason why, say analysts.

"We live on savings but it's difficult, we tried to buy only the necessities," said Zhou Ran, a self-employed decorator in central Henan's Xinxiang city who couldn't work for four months earlier this year amid lockdowns.

Sales of clothing and shoes remain down 15% over the first eight months, while fuel and other petroleum product sales are down 17.3%. Incomes from food and beverage sales fell over 26% in this period.

SHOCKED SPENDERS

Analysts will be closely watching data and company sales reports from China's "Golden Week" holidays on Oct. 1-8 to gauge how quickly consumers' mood is improving.

Though Zhou returned to work in May, business was hard to find. "Many people prefer to keep cash for now so they delay renovations," he said.

"It is difficult for everyone this year," said Zhou, whose wife takes care of their three children and doesn't have an income.

A quarterly report issued jointly by the research arm of Alibaba-backed Ant Group and Southwestern University of Finance and Economics showed the vulnerability of low income families to the epidemic.

Most households with annual incomes below 100,000 yuan ($14,800) reported their wealth declined in the first and second quarters. Those with incomes above 300,000 yuan reported consistent gains.

"Higher-income households have probably built up savings, because of the forced reduction in consumption during lockdown, and could now be ready for a spending spree," said Wei He, an analyst at research firm Gavekal Dragonomics, in a note.

"It is lower-income households that face a longer slog of normalizing their finances," he said.

JD.com data shows that consumption growth in lower-tier cities and low-income groups was weaker than in major cities and high-income groups in June, reversing the usual trend, according to Shen Jianguang, chief economist at JD Digits, the Chinese e-commerce giant's fintech arm.

This is likely because the small and medium-sized enterprises which employ many lower-income people were affected more by the epidemic, Shen said in an article published August.

The impact on consumption could be considerable. Some 600 million Chinese people earn a monthly income of barely 1,000 yuan, according to Premier Li Keqiang, speaking in May. That would be over 40% of the country's population.

Beijing has issued a slew of policies to stabilize jobs and support spending over the last months. Local authorities and companies have, for instance, handed out billions of yuan in shopping vouchers.

ANY PORT IN A STORM

To be sure, China's recovery, as imbalanced as it is, is still a bright spot in global consumption as other major economies battle a second wave of infections and in some cases impose fresh curbs on activity.

Many in China's vast export-oriented sector have turned to the domestic market as foreign orders dry up, with enthusiastic government support.

An app from Alibaba Holding Group Ltd which helps manufacturing suppliers sell directly to domestic consumers has seen 1.2 million companies sign up since its launch in March. Nearly half were export-focused previously, according to an Alibaba spokesperson.

Domestic orders now make up 40% of total orders for Tu Xinye, the manager of a company that makes toothbrushes in southern Jiangsu province.

That's up from just 10% in the past, and overall sales volume has returned to 90% of pre-COVID levels, he said.

But while Chinese consumers made up for the company's shrinking overseas orders this year, they also create new challenges, said Tu.

Competition is fiercer at home than in the bigger "blue ocean" export market, and Chinese buyers also like different kinds of toothbrushes - with softer bristles and smaller handles.

Tu's company's relative success has been an outlier in his town. Many smaller companies there have collapsed, and Tu is now in the process of acquiring a competitor.

"Times of crisis are also times when there's some economic reshuffling," he said.

By Sophie Yu, Gabriel Crossley and Yawen Chen


Stocks mentioned in the article
ChangeLast1st jan.
ALIBABA GROUP HOLDING LIMITED -2.52% 304.69 Delayed Quote.43.65%
CHINESE PEOPLE HOLDINGS COMPANY LIMITED 0.00% 0.053 End-of-day quote.-1.85%
PRADA S.P.A. -3.79% 30.45 End-of-day quote.-5.43%
UNITED STATES DOLLAR (B) / CHINESE YUAN IN HONG KONG (USD/CNH) 0.00% 6.6923 Delayed Quote.-3.84%
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