China’s Consumer Spending Slump Threatens Global Brands

President Xi Jinping's administration is under intensifying pressure to address the downturn in China's consumer spending, which has emerged as a significant threat to global economic stability.

Alarming Economic Indicators

• Services Activity: A critical gauge of Chinese services activity, covering the retail sector, teetered on the edge of contraction in July for the first time since last year. This is part of a broader disappointing economic picture revealed by recent purchasing manager indexes.
• Deflationary Pressures: Persistent deflationary pressures are evident, not just in manufacturing but across various sectors.

Impact on Global Brands

• Consumption's Role: For the first time since late 2022, consumption contributed less than half to China’s US$17 trillion economy in the second quarter.
• Affected Brands: The consumer spending slump has hit global brands like Starbucks, L'Oréal, and Japan's Fast Retailing, leading to declining sales and stock valuations.

Economic and Political Reactions

• Consumer Spending Focus: The Politburo has vowed to make boosting consumer spending a greater policy focus for the rest of the year. However, there is skepticism among investors due to a lack of detailed plans.
• Manufacturing and Exports: Despite promises to boost consumption, manufacturing and exports remain vital to China’s economic recovery.

Contributing Factors

• Housing Slump: A prolonged housing slump has significantly impacted household budgets, leading to reduced spending.
• Wealth Tied to Real Estate: JPMorgan Chase & Co estimates that China’s urban middle class has about 60% of their wealth tied to real estate, further contributing to cautious spending habits.

Global Brands' Struggles

• Competition and Thrift: Global brands are grappling with sluggish demand and competition from cheaper, local alternatives. Thriftier habits among Chinese consumers have hurt profits and share prices.
• Starbucks: The coffee chain reported a faster-than-expected decline in same-store sales in China. It seeks a local partner to regain market share, having previously spent US$1.3 billion to buy back its domestic stores.
• Luckin Coffee: Meanwhile, Luckin Coffee, a top local competitor, has attracted consumers with cheaper options.
• L'Oréal: The French beauty-products giant posted a 2.4% sales drop in North Asia, marking the fourth consecutive quarter of falling sales in the region.
• McDonald's: The burger chain reported a decline in same-store sales, noting that Chinese consumers are increasingly deal-seeking.

Future Outlook

Despite the Politburo’s pledges, there is uncertainty about whether these promises will translate into effective measures to stimulate consumer spending.

• Investor Sentiment: Chinese consumer stocks soared following the Politburo’s announcements, but many investors remain unconvinced.
• Wealth Effect: "The wealth effect is under pressure in China," said Nelson Yan, co-chief investment officer at Fosun Wealth International in Hong Kong. "Consumer downgrading is still around."

China’s consumer spending slump presents a complex challenge with significant implications for both domestic and global markets.