China’s Consumers Are Not Spending Enough — Here’s Why

Business September 9, 2019

Future Uncertainty

The huge consumer base in China is currently going through a phase that could affect the economy which is already under some form of pressure. Analysts have noted that while individuals are in a good state financially, they are being reluctant about spending because they are uncertain about what the future has in store.

Individuals are in a good state financially, but they are reluctant about spending due to future uncertainty

According to JD Digits’ chief economist, Jian Guang Shen, the fall in consumption ranks as the biggest risk as everybody knows about fall in investment and trade tensions. Shen added that the confidence of everyone and in the situation of the year has declined and the decline immediately affected consumption. Shen also said the consumption in the coming months will continually move at a slow pace.

The retail sales fell to 8.6% last month which was quite disappointing. That stood in sharp contrast with the performance in past years where the record was close to 10% growth. According to a senior partner who works at McKinsey, Daniel Zipser, there’s anxiety that the economy as it moves forward might not perform so well.

Economy Challenges

The economy of China has slowed down this year in the midst of government efforts to lower the reliance on growth fuelled by debt and that has made it harder for businesses to get financing. The uncertainty has been further affected by the increasing tensions between U.S. and China. Also Shenzhen and Shangai composite are part of the worst performers in the world this year and that hasn’t helped the confidence.

Also, a lot of Chinese consumers have been affected by the scams on P2P lending platforms claiming that they will connect individual investors directly with borrowers, but at the end of the day carted away the money. In addition, more and more Chinese now have to pay back home mortgages. However, the pressures have not stopped them from spending in its entirety. The 8.6% growth in China’s retail sales is currently higher than the 4.6% of the U.S. in October.

The trade tension between the U.S. and China has further increased the uncertainty

Also, analysts have noted that Chinese spend more on healthcare, dining out and travel and they have enjoyed sale tactics incorporating facial recognition and augmented reality. Linda Yu, the research manager for JLL said that 37% of newly opened businesses in shopping malls Beijing in the past twelve months were for beverages and food. She also added that home accessories and sportswear store openings also experienced significant growth.

Likely Risks

The consumers are capitalizing on the advantages of fast development in Chinese fintech which gives room for buying on credit or installment purchasing. Analysts opine that the general amount is still low but it is still necessary to watch the trends for subsequent risk. According to Felix Yang, with the lending market, consumers have been able to access expensive products like the recently launched iPhone X which ordinarily would not have been possible for them to buy.

The younger generation reportedly contributes immensely to this trend. According to Fenqile, an installment purchase platform, the number of customers it had for its November 11 Singles Day doubled and the generation born after 1995 accounted for over 60% of the entire sales for the day. Ant Financial, an Alibaba affiliate allows its customers to buy on credit via its Huabei platform. The figures on how the consumers made use of Huabei during that Singles day were not available.

However, despite concerns, the fintech companies have argued that they would not be running their lending business if the customers were unable to pay. According to Fenqile, almost half the customers it made in 2015 first quarter remained active users over 3 years later.

Concerns About Credit

The growth of the Chinese economy is relying heavily on consumption

According to Sherri Je, a partner at A.T Kearney, the finance of consumer currently plays a very important role in the market than it played 5 years ago. She further noted that online retailers that offer consumer financing have recorded an increase in their purchases.

She stated that their own Level of credit usage isn’t beyond U.S. spending and is currently still in the early development stages. According to her, the stability of the Chinese economy will not be affected by overall consumption. However, it appears that the growth of China is relying so much on consumption. Official data reveals that at the moment it contributes to me than two third of the yearly GDP growth.