Size of the Chinese market has not changed; consumer sentiment has shifted.

In the first months of 2024, some of these remedies have been applied. One was to focus on industries such as EV, AI, and cleantech. Another was to improve product quality with the catchphrase new quality productive forces. A third was a renewed focus on exports to markets in SEA, the US, Europe, Africa, and South America – with success. Chinese car brands are gaining an increasing market share in South America, be it internal combustion engine or EV type cars. However, EV exports have come under scrutiny in Europe and the US, as the Chinese government has provided massive support in the form of subsidies or favorable regulations and policies.

One of the highest saving rates in the world

The key element missing from the remedies is the stimulation of domestic consumption. Sure, consumers are encouraged to travel within the Chinese Mainland or trade the purchase of international brands for local Chinese brands. What is missing is the encouragement to reduce the savings rate of Chinese citizens. The reported savings rate of more than 40 percent is one of the highest in the world (FT, March 5, 2024), and a lower savings rate would free up billions of RMB for domestic consumption spending.

However, to reduce the savings rate, Chinese consumers need to be more confident. During the pandemic, Chinese citizens’ confidence took a beating and has not fully recovered. Savings are considered necessary as there is still a lack of health insurance coverage, and the state pension fund is short of funds for current and future generations of retirees. The aging population is exacerbating the situation.

In January 2024, officials in the 12 most indebted provinces and cities have been ordered to delay, reduce, or stop work on government-funded transportation infrastructure (Asia Financial, January 2024). As a result, it is reasonable to expect that citizens in these provinces and cities will reassess their spending rate and be cautious in their day-to-day and big-ticket spending patterns. The ripple effects can be felt across China and are likely to increase savings rates across China in 2024.

Pay cuts, fierce competition and difficulties in keeping a job in tech industry

Across all industries, there have been pay cuts, often substantial, combined with a reduction in the size of the workforce. Notably, recent layoffs in the tech and electric vehicle industries are causing further anxiety among both educated and non-educated workers. The tech industry is facing more restrictive regulations in China and overseas. EV sales dropped due to lower demand because of the termination of many consumer subsidy programs. The fierce competition among EV manufacturers has led to the closure of EV production facilities and the downsizing of staff.

To make matters worse, it has become increasingly difficult to keep a job in the tech industry after the age of 35. Government jobs, which had been shunned in the past, have become attractive again, despite their relatively low pay structures. However, the age limit for joining the government is 35. This makes it difficult for anyone over the age of 35 to find new employment at the same level of remuneration or seniority. For people based in Europe, this is puzzling because in Europe, workers in this age group are in high demand as they are considered skilled workers.

Consumer sentiment is pessimistic

This is the first time in many decades that employment is not guaranteed for university graduates and experienced workers, and promotions to more senior positions are harder to come by. Society must get used to this situation and people will therefore be more risk-averse in taking career, employment, and educational decisions. Families with uncertain financial prospects may decide to cancel or shorten their children’s education abroad. As a result, domestic consumer sentiment is not optimistic and can be described as a search for value and bargains. In an economy where competition is fierce and margins are quickly eroded, such consumer behavior is even more challenging.

However, the size of the market has not changed; it is the consumer sentiment that has shifted. This change in the market will continue for some time until society learns to live with the new parameters.

It is important to observe and understand the different segments of the consumer market. In the luxury segment, for example, it has become clear that the open display of wealth is no longer politically desirable and that more discreet behavior is appropriate. Recent statistics show that sales of luxury goods have declined, albeit from a high level. Luxury products are still in demand, but sales, marketing, and distribution channels need to be adapted to changing market conditions. This can be achieved by introducing brands and products from lower levels of the brand pyramid or, for higher-priced items, by creating a club concept that allows for more targeted campaigns to existing and potential customers.

Trend towards local brands

In other product categories, there has been a trend towards local brands, based to some extent on nationalist sentiment. These products need to be marketed as locally made, if possible, to remove the stigma of being imported. This will further increase the pressure to produce in China for China. The geopolitical situation drives behavior in this product category as well as government statements.

Consumers are being driven to buy from low-cost retailers such as Miniso. Chinese consumer behavior is influenced by expectations of future salaries and economic prospects, creating headwinds as Chinese shoppers trade down from more expensive retailers (FT, May 13, 2024).

The trend seems to be: be present on as many online retail channels as possible to provide consumers with the most convenient way to shop and to compare product quality and prices. Such operations require flexible and fast operating models with local decision making in China. This further drives localization in China, which can be a challenge for SMEs with limited management bandwidth.

Conclusion

The Chinese consumer is facing a challenging economic situation that is undermining consumer confidence and is likely to result in even higher savings rates as long as uncertainty persists. Consumer behavior requires a different approach to distribution channels, product design, characteristics, and pricing. This creates opportunities and challenges for existing and new market participants.