Cheap Goods To Confidence Deficit: Inside China’s Economic Slowdown

-Analysis-

BEIJING — A theme is making the rounds on Chinese social media: “Beautiful boom times.” Users post nostalgic snapshots of pre-pandemic daily life. Street scenes, fashion, music, toys, food and the bygone lifestyle have become a kind of spiritual longing for many — even if some images look dated, even shabby. A melancholy mood is spreading, a clear sign of resignation. The situation feels dire, and hope for a better future is in short supply.

This mood is shaping consumer behavior as well: domestic demand in China is weak. People simply do not have the money. And above all, the government’s measures to boost spending have had little effect so far. The trade dispute with the United States could not come at a worse time.

During the eight holiday days of the so-called Golden Week in early October, which traditionally should spur travel and consumption, vendors tried more than just bargains: discounted cinema tickets, aggressive tourism deals, advertising drives of every kind. Yet Golden Week wound up notably less golden than forecast.

Price wars

Although Chinese travelers logged 888 million trips in that week, more than 120 million above last year, they spent less: average travel outlays fell to around the equivalent of 110 euros, the lowest figure since 2022. Makers of so-called new energy vehicles, in other words models without combustion engines, are also under pressure. From October 1 to 12, sales reached 686,000 vehicles, eight percent fewer than a year earlier.

Germans who visited China ten years ago and return this year are likely to be shocked by how much lower consumer prices are. The price war is not just fierce; it is practically suicidal. A returning tourist showed me a fairly high quality cotton sweater she ordered online from a mall store in a major Chinese city. It arrived at her hotel within an hour for the equivalent of 24 cents, all in. Even international brands, like IKEA, now have to compete in this race to the bottom.

Whatever the official statistics say about growth in the economy and consumption, the plunge in consumer prices tells the opposite story.

Subsidies have only fueled the price war.

China’s leadership has done what it could to stimulate consumption with four rounds of state subsidies. In the latest round, 6.9 billion yuan, or 833 million euros, was allocated from October through year end for a wide range of goods, from household electronics and phones to cars, furniture, clothing, and much more.

Highly indebted

The subsidies have only fueled the price war, and they are unlikely to fix the structural weakness in demand. Some experts expect deflation, while others argue China is already in the midst of it.

The weakness in domestic demand is hardly surprising after the real estate market collapsed in 2020. An economy that leaned so heavily on an unsustainable property boom cannot possibly generate the same momentum for the home market, especially given the enormous debts at the local government level. Those authorities are now trying to cope by increasingly pledging their assets.

However, if local governments try to solve the debt problem by raising the leverage on state assets, there is a serious risk they will borrow from state owned banks or public funds such as pensions or health insurance. Since many private investors are losing confidence in the government, it is inevitable that local authorities will seek more state financing, shifting the burden onto the next generation of Chinese.

But that in turn points to inflation and a wider wealth gap in the decades ahead.

Distrust for the state

The state is already the largest owner of wealth in China and is now trying to prod the private sector to extract profits from state assets. For example, officials in Hubei Province recently convened a meeting to reform the management of state-owned properties, warning that this is where it gets bureaucratic and cumbersome, “three types of assets.”

They stressed the need to deepen understanding of three principles: that all state resources should be turned into assets wherever possible, that all state assets should then be made tradable wherever possible, and that all state funds should be used as leverage for investment. Furthermore, four methods should be applied to carry out the reform of managing the three asset types: use where possible; sell when unused; lease when unsold; and finance where possible.

Such measures are meant to encourage private firms to generate returns from public assets. That might have worked in the pre-pandemic era. Now, however, the loss of market confidence is severe, and not only because shrinking incomes and rising unemployment are suppressing further investment.

Plundering of private companies

It has always been risky for private investors to partner with local governments, since the judiciary depends on the state. Even in better times, countless successful entrepreneurs were illegally prosecuted and stripped of their companies simply because local authorities wanted their assets.

The robber was the local government.

In the post-pandemic crisis, the environment has deteriorated even further. Local governments are increasingly plundering private companies with little restraint, a pattern linked to a series of suspicious suicides among successful businesspeople. One widely noted case involved a businesswoman who built ten government projects and sued the authorities for nonpayment of 26 million euros. She was arrested and jailed for inciting unrest. In another, a private investor was robbed of a newly built wastewater treatment plant. He had invested 96 million euros. The robber was the local government.

And while private investors are losing confidence because of unchecked state power, job prospects are poor. Added to that is an incomplete social safety net, which is making people more cautious with their spending. The trauma of the harsh lockdowns during the pandemic is also putting downward pressure on marriage and birth rates among the young. Between three and six million births are expected in 2025, compared with nearly 17 million in 2001. The collapse in the birth rate, in turn, reduces consumption in the short and long run.

Add to this weak global demand, the trade dispute with the United States, and the associated reworking of supply chains: none of it helps lift consumption. The biggest challenges for the world’s second largest economy, however, are at home.