China’s shoppers hesitate to spend big in face of deflation

Consumers are cautious about purchases as growth prospects slow in the world’s second-biggest economy. Photo / Mark Mitchell

For Song Jingli, a 39-year-old founder of a communications start-up in Beijing, 2023 was supposed to be a year of big spending. She and her husband hoped to travel to New Zealand and buy a second apartment in the Chinese capital. But by the time summer arrived, the state of the economy had persuaded them to avoid expensive purchases. “It’s like when you know the storm is coming,” said Song. “You stay away from the water.”

As China slides into deflation for the first time since 2021 — consumer prices fell 0.3 per cent year on year in July — people are thinking carefully about how they spend their money. The property market has slowed, exports are weak and youth unemployment has soared, but policymakers have stopped short of enacting major stimulus.

The deflation in July reflects in part a 26 per cent fall in the price of pork, the single biggest portion of the consumer price basket. Pork prices were weighed down by higher supply and are expected to fall less sharply in August, but analysts at JPMorgan warn car prices and rental costs are also a deflation risk in China.

The sustained weakness in overall price increases — core inflation excluding food and energy prices has edged up but remains at 0.8 per cent — has confounded expectations that the removal of Covid-19 restrictions at the start of the year would unleash pent-up consumer demand, as it did in other major economies.

The spectre of deflation in the mainland also comes amid signs consumers are putting off major purchases, especially of houses, cars and travel, until confidence returns.

Excess savings in China have increased in the first half of the year compared with the same period last year, and there is still a gap between pre-pandemic and current consumption, UBS said this month at a briefing in Shanghai. “We believe that the main reason for the gap ... is the lack of consumer confidence,” said Christine Peng, an analyst at UBS.

“China never had a low inflation problem before,” said Dan Wang, chief economist for Hang Seng Bank in Shanghai, noting the fast growth and credit expansion of the past have recently slowed alongside a declining population.

Young spenders in particular are under pressure to cut back. The government this month stopped publishing data on youth unemployment shortly after it hit a record high of 21 per cent, weighing heavily on confidence.

One 25-year-old employee of a state-owned enterprise in the eastern province of Anhui, who asked to be referred to as Pang, said he had cut back on spending following a pay cut. “I used to buy my girlfriend SK-II skincare sets without batting an eye,” he said, referring to the Japanese premium brand whose sets usually cost about $200.

For major purchases such as property and cars, he added that he “completely depends on his parents”.

“I don’t have a desire for non-essential stuff anymore,” said another 26-year-old office worker in Beijing, surnamed Xu, who pointed to an online trend in China referred to as “consumption downgrade”, popular among young people keen to conserve cash.

Memes suggest replacing laundry detergent with washing powder, using CeraVe lotion instead of premium La Mer moisturising cream and quitting the gym to follow workout videos at home.

The wider consumption landscape across age groups in China is less clear cut.

Retail sales in July were slightly up compared with the same month last year, and price declines for daily products are not widespread despite the overall decline in consumer prices. Two retirees queueing for a restaurant in Shanghai said the bad economic news had had “no impact” on their spending, saying it was more of a problem for young people.

But a so-called deflationary spiral, in which consumers defer spending in expectation of lower prices, is already a risk in the property sector. Prices fell 0.2 per cent month on month across the biggest cities in July, and total sales from the biggest developers are down sharply this year.

Song, the communications start-up founder in Beijing, said prices had not fallen enough for her to buy property, and she was wary of taking out a mortgage, citing a “change in mentality”.

There are also signs of a spillover effect in other goods related to property. In the official breakdown of the consumer price index from China’s National Bureau of Statistics, rent fell 0.1 per cent in July year on year. Prices of household appliances, which are under pressure from the housing slowdown given fewer transactions, dropped 1.8 per cent.

Retail sales for furniture were flat, according to a UBS analysis of official data, and sales of household appliances and audio products fell 6 per cent. Retail sales at restaurants, by contrast, rose 11 per cent.

For some people, prices are still too high relative to their wages.

A 27-year-old resident of the central city of Changde in Hunan Province, who asked to be identified by her nickname Xiaodiu, said her main financial issue was her low income, adding that she did not feel prices were lower in a third-tier city than in China’s bigger cities. The average annual income in Changde is Rmb40,494 ($5,560), less than half the average in Beijing and Shanghai.

Xiaodiu said she was planning to replace her MacBook Air this year, but decided to stick with her old one instead.

“A penny saved is a penny earned,” she said.

Written by: Thomas Hale, Wang Xueqiao and Gloria Li.

© Financial Times