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How Worried Should China Be About its ‘Consumption Downgrade’?
In this March 30, 2018, photo, a shopper pushes a cart as he walks through a 7FRESH grocery store in Beijing, China.
Image Credit: AP Photo/Mark Schiefelbein

How Worried Should China Be About its ‘Consumption Downgrade’?

 
 

The success of Pinduoduo, China’s fastest-growing e-commerce platform for low-price products, has always been in the shadow of the so-called “consumption downgrade.” From the time the number of Pinduoduo’s active users first surpassed China’s No. 2 ecommerce platform, JD.com, this January to its IPO at Nasdaq in late July, its association with the supposed “consumption downgrade” has always been an unfavorable tag that the company can’t get rid of.

The growing sales of pickled vegetables, cheap liquor, and instant noodles are also interpreted as other signals of a consumption downgrade. Likewise, the sharing economy, which is largely promoted by Chinese government as a way to ease urban traffic, has now become another piece of evidence.

Some economists with a pessimistic attitude toward China’s consumer confidence believe the trade war panic and China’s economic slowdown are factors behind the success of Pinduoduo and the popularity of low-price products. Many analysts are encouraging Chinese people to adopt more conservative spending behavior to counter a potential economic downturn.

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This caught the Chinese government’s eye. The Chinese Ministry of Commerce (MOFCOM) has slammed the concept of a “consumption downgrade.” According to the Chinese state-backed print media The Global Times, MOFCOM spokesperson Gao Feng said it is inaccurate to argue China’s consumption is downgrading. Instead, Gao argued that the supposed evidence for a “consumption downgrade” is actually another aspect of China’s consumption upgrade, reflecting a change in consumers’ attitudes to be more rational and environmental-friendly.

MOFCOM’s argument makes sense in some ways, and the Chinese government does have reasons to worry about widespread use of the phrase “consumption downgrade.” The definition of “consumption downgrade” — and whether it actually means the opposite of a consumption upgrade — is still debatable, but a pessimistic mood about China’s economic future may be much more toxic to its economy and consumer confidence. In other words, the mere belief in a consumption downgrade may cultivate ever more thrifty spending habits and slow down or even reverse China’s consumption upgrade process, creating an even higher saving rate and debt issues. What’s more, the pessimistic mood of China’s growing middle class about their future personal income and the business environment will lead them to question the Chinese Communist Party’s stance in the trade war and its governance capability.

Actually, China’s consumption remained strong through the second quarter (Q2) of 2018, according to Nielson’s China Consumer Confidence Index. Mckinsey & Company also pointed out in its 2017 China Consumer report that a new health craze is growing among Chinese consumers, and they now love local brands, too, as quality, value, and service are more important factors to them, instead of luxury clothes and bags with big brand logos.

However, some long-standing issues in China’s economy, like soaring property and rental prices, are strong factors causing Chinese people to perceive a decrease in their disposable income. Housing rental prices in China’s top-tier cities have increased by 40 percent due to the market competition between Ziroom and Danke, the two major apartment rental service providers in China, which has directly hurt the middle-class’ spending capability.

Similar evidence can be found in Nielsen’s Q2 report on China’s consumer confidence index: The index of third-tier cities increased by 4 points to 116 in the second quarter, while the index for first-tier cities slightly dropped to 111. The soaring living expenses in China’s top-tier cities are pushing what was originally the most important consumer group to begin saving money.

This in some way explains the myth of Pinduoduo as the cultivator of “consumption downgrade.” Pinduoduo’s largest clients, consumers in China’s third- and fourth-tier cities were forgotten by Alibaba and JD.com. Now these customers are actually spending more after finally being included into China’s online-shopping population.

The popularity of low-price products will not slow down China’s consumption upgrade reform, which partially shows the success of supply-side reform. However, some threats are gathering in China’s economy. The Chinese government should work on timely regulation and appropriate policies, or these risks will eventually hurt its people’s wallets.

Biyun Song is a young professional based on Washington DC.

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