What does it mean for the world when Chinese consumers tighten their belts?
With slower growth in China’s economy, young professionals and middle-class people around the country are tightening their belts and cutting down on spending. Many young people say the change is related to the national response to economic challenges. The shift has prompted many foreign governments to raise concerns about China forming excess production capacity, and the impact that could have on the nation’s domestic economy, international relations and even life decisions made by Chinese…
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00:00A meltdown during a live stream by China's so-called lipstick king.
00:17The online influencer was responding to a fan who complained that 79 Yuan eyebrow pencils
00:24Li Jiaqi was promoting were too expensive. But the outburst would prove costly for Li,
00:30who earned his lipstick king title for once selling 15,000 pieces of the cosmetics
00:36in five minutes. He scrambled to try and retain his crown with this tearful apology.
00:54But it did not work. Overnight, 1 million of Li's 30 million followers dropped him.
01:07China's state-run broadcaster CCTV weighed in, publishing an op-ed saying live streamers who
01:14battled with consumers were destroying their own rice bowls. But does this one influencer's
01:20public relations crisis tell us something about wider changes in China's economy?
01:26And what do those changes mean for the rest of the world?
01:33Consumer sentiment in China has remained pessimistic despite the end of the COVID-19
01:39pandemic. In the first quarter of 2024, a survey by the country's central bank found more than
01:4660 percent of urban residents planned to save more money. Only 10 percent said they thought it
01:52was easy to find a job. Market analysts have also noticed the country's middle class and young
01:59professionals are changing their spending habits. The customer decision journey has become a lot
02:06longer. So when it comes to durability, price comparison, performance of the products they
02:14want to buy, I think such behavior changes happen not only because of sentiment, not only because
02:23they think saving money is cool, but because they really don't have much money or have a lot less
02:30money than before. So we are seeing salary and bonus cut in high growth sectors such as finance
02:37and tech. That is not to say there are no winners amid the current market trends. Some domestic
02:43consumer brands are benefiting from the shifts. A 2023 survey showed 70 percent of online shoppers
02:50in China go local when buying clothing, while over 90 percent buy snacks and beverages from
02:57home-grown businesses. They are more culturally relevant to the consumers and there's encouragement
03:04from the central government for people to buy more made-in-China, designed-in-China products.
03:09So that is one. And also traditionally Chinese consumers see local brands having less premium.
03:17But what is it like to be in the middle of all these changes? Yvonne works for one of China's
03:23tech giants. She joined back in 2017 when companies like her employer were known for
03:29hosting extravagant sales events and offering generous compensation packages. Yvonne asked us
03:36not to use her full name because she is not authorized to discuss internal company matters.
04:06But like at all parties, the music eventually stopped.
04:29As China's crackdown on tech continues, business leaders...
04:31This could be a more muted event this year against a backdrop of regulatory
04:34crackdowns in China. And some of the, I mean, the China stocks are just getting whacked.
04:38Chinese authorities initiated a regulatory storm targeting the country's big tech firms in late
04:452020, setting concerns that the major internet platforms were becoming too large and powerful.
04:52Authorities halted IPOs, launched antitrust investigations, and fined tech companies for
04:59data security and anti-competition violations. The companies, which once rifled their foreign
05:05counterparts in market capitalization, saw their share prices plummet. But the downward spiral
05:12has been reflected in more than share prices and news headlines.
05:17Yvonne says she started to feel the pinch in her career.
05:29China's
05:58consumer price index has remained at a low level for nearly one year due to weak demand.
06:05Its March consumer price index went up by just 0.1%. Factory gate prices have kept dropping
06:12for 18 months, adding the pressure of an oversupply of goods. To survive, many Chinese
06:19companies are eyeing overseas to sell their products, but are facing growing pushback
06:25in the United States and the European Union, who accused China of exporting overcapacity,
06:31especially in the new energy sector.
06:56Pettis, an economist based in Beijing, has long argued that China's economic model
07:15suffers from an over-reliance on investment-driven growth rather than domestic consumption.
07:21In 2022, consumption contributed to more than 50% of China's GDP. While that may seem like a lot,
07:29it lags behind domestic consumption in many major economies such as the US, Japan, and India.
07:37But given how tense the geopolitical environment is, it's very clear that that's not going to
07:42happen. The US is already expanding its manufacturing shares, so is Japan. India
07:49has made it very clear that they will not accept a reduction in their manufacturing share.
07:54So what are the possible outcomes of this economic debacle?
07:58Pettis says there are three potential scenarios.
08:06So rebalancing means that for the next few years or next few decades,
08:12consumption has to grow faster than GDP and investment has to grow slower than GDP.
08:18So one way that could happen is the good way, which has never happened in history.
08:24That is that China implements policies that drive up the growth in consumption
08:29to something like 7%. And this would allow them to bring the growth in investment down to 1 or 2%
08:37and still have GDP growth of over 4%. Could they do this? Yes, if they transferred about
08:441 to 2% of GDP every year from local governments to the household sector.
08:54That is that consumption growth drops a little bit, but investment growth drops a lot and GDP
09:01growth drops a lot. So in that scenario, consumption growth in China could continue at 4% a year.
09:09Investment growth would drop to maybe zero or even negative, but GDP growth would drop
09:15to around 2% or less a year. That's sort of the Japanese style adjustment.
09:24The third form of adjustment is sort of the way the US adjusted in the 1930s.
09:30The US in the first three years of the decade saw GDP contract by 35%. The US lost more than
09:39one third of its GDP. Household income contracted by half of that. Very painful, but notice that
09:47household income grew relative to GDP. The advantage of that adjustment is that it's very
09:54quick. The disadvantage, of course, is that it's politically very destabilizing and very painful.
10:00But how could China transfer income from the government to households?
10:04Patty suggests local governments could fund better social security programs that would increase the
10:10income of households, but it will not be an easy fit because many local governments are heavily in
10:16debt. From a cash flow point of view, yes, they're in serious trouble because they relied so heavily
10:23on the real estate sector as an alternative for taxes. But don't forget, local governments
10:30own a lot of assets. The poster child of bankrupt local governments is Guizhou, and Guizhou owns
10:39many things, including they own Mautai, one of the most valuable companies in China.
10:45So the question is, do local governments need to own all of these assets? No, in most countries,
10:52governments don't own so many assets. Can those assets be transferred directly or indirectly
10:58to the household sector to boost household income? In principle, yes. Politically,
11:04very difficult to do. But trade war and geopolitical tensions aside, for ordinary
11:09people like Yvonne, finding clarity and certainty in such trying times is the key to staying sane.
11:22The problem is that what's best for ordinary people is not best for the economy. What's best
11:50for ordinary people is to be cautious and to increase their savings. But if everyone increases
11:57their savings, that reduces demand. So the whole economy slows down. And in the end, nobody has
12:03any more savings. So it's very tough. This is why policy is so important. Depending on what
12:11policies Beijing implements, we could see very, very different outcomes. As China's young
12:18professionals cut back on spending and foreign leaders express concern about China's supposed
12:24excess production capacity, the way China manages its economic slowdown will significantly impact
12:31its domestic economic stability, its international relations, and life choices made by its people.
13:01you