After China’s growth numbers and youth unemployment rate were released for the first half of 2023, I focused on what’s wrong with the Chinese economy. In June, the youth unemployment rate between the ages of 16 and 24 reached a record high of 21.3 percent. During the same period, the unemployment rate for city dwellers was 5.2 percent. In March, the government in Beijing set a growth target of around 5 percent for 2023. China grew 4.5 percent in the first quarter and this momentum should continue in the second quarter, growing 7.3 percent. But the expectation was not fulfilled. To get their opinion and find out how their businesses are doing; I started asking my Chinese friends around me. Although some of the answers I received matched the indicators, it took me a while to figure out the source of the problem. A friend of mine who works in the chemical industry was unhappier than two years ago and painted a pessimistic picture that things were not going well at all and would only get worse. A Chinese friend who had just started a new design company painted the picture that his business was doing worse than expected and that the companies he was dealing with were reluctant to make new investments. My third friend made a comment that helped me understand the problem of the Chinese economy. He said the main problem in China is the decline in domestic demand.
Savings are increasing and luxury consumption is declining in China
The consumer behavior of 1.4 billion people in China is undergoing significant change. I expected that once the Covid-19 travel barriers were lifted, the Chinese economy would see significant growth, particularly from people coming to China from abroad to trade. But there was one point I forgot about this perspective. That was the demand behavior on the domestic market. The Chinese still have money in their deposit accounts and the number is growing. In 2020, China’s domestic savings totaled 93.44 trillion yuan, in 2021 it was 103.3 trillion yuan, and in 2022 it reached 120.3 trillion yuan (about $17.116 trillion). In the first half of 2023, another 12 trillion yuan was added to those savings, more than the increase in all of 2021. In short, people in China prefer to save rather than consume, leading to a decline. In China in particular, the decline in luxury consumption or demand is leading to an important change. Because the decline in demand for luxury goods in the domestic market leads to an increase in unemployment. For example, sales of Maotai, the most expensive brand of baijiu (Chinese alcohol), have fallen significantly. Maotai is one of the most expensive drinks in China, and a small bottle costs 10,000 RMB (about US$1,392). Since 2022, sales of not only Maotai but also all other luxury baijiu brands have dropped dramatically. But people have not stopped drinking alcohol, they have replaced it with cheaper alcohol products, and the demand for luxury has decreased. Okay, but what does this have to do with alcohol? Baijiu is a special drink that is an integral part of various celebrations such as holidays, weddings, business dinners, etc. for rich or middle-class people in China, or as a gift to friends.
The thrift of the Chinese has swept through all areas of entertainment, culture and sports. According to the Guangdong Provincial Bureau of Statistics, from January to October 2022 last year, Guangdong’s fixed asset investment in culture, sports and entertainment fell 7.7 percent, wholesale and retail fell 8.2 percent, accommodation and catering fell 18 percent Forestry, animal husbandry and fisheries by 20 percent. Compared to 2021, culture, sports and entertainment grew by 5.5 percent, wholesale and retail by 2.3 percent, accommodation and catering by 35.6 percent, and agriculture, forestry, animal husbandry and fisheries by 36 percent. However, considering that China has strict Covid-19 travel restrictions in 2021, growth in 2023 is quite normal, but investment will no longer be shifted to this area. These are all areas where private investment and entrepreneurship are concentrated. Therefore, it is clear that China’s small and medium-sized enterprises have decided to adopt risk-tolerant financial management from 2022, stop investing abroad and seek stability through savings. In 2023, extravagant and unnecessary spending on alcohol, jewellery, nightclubs, fine dining, etc. took a severe hit.
The picture for the Chinese economy is better than for Europe and the US
The Chinese consumer price index is currently close to zero. It was 0.2 percent in May and June, 0.1 percent in April and 0.7 percent in March. In the first half of 2023, the US economy grew 2 percent and the CPI rose 0.1 percent in May and 0.2 percent in June. In Germany, the CPI reached 0.3 percent in June, while year-end growth is expected to be 0.2 percent. Analyzing both China’s CPI and growth data reveals that the figures compare favorably to developed countries such as the US, UK, Japan and Germany. Although luxury demand in China is falling, other data is still positive. In the automotive market, data is where it should be. In the first half of 2023, vehicle purchases rose by 9.8 percent to 13.24 million units compared to the same period last year. Electric car prices in China aren’t exactly cheap, but car buying hasn’t been affected. Auto sales in China are expected to reach 27.6 million this year, and electric vehicles are expected to sell around 7 million. On the other hand, the real estate market in China is shrinking. People are not inclined to buy houses. Due to overcapacity in the real estate market, a third of all new houses in China remained unsold in 2022. This is because real estate prices in the big cities are constantly increasing and it is clear that there is no high return when buying a house.
China belongs to the world and is indirectly affected by the global decline in demand. For example, 1.16 billion smartphones are expected to ship worldwide in 2023, down 2.8 percent from 1.2 billion in 2022. In the second quarter of 2023, global shipments of personal computers fell 13.4 percent to 61.6 million units, marking the sixth consecutive quarter of decline. In addition, economic problems at a global level have resulted in lower than expected growth. Chinese household confidence is being shaken by the combination of Covid-19 measures, global economic and geopolitical risks. In summary, people in China are not experiencing a financial doldrums, but they are saving and shunning luxuries. In addition, rising unemployment and weak investment are also leading to a drop in demand from Chinese households. If this saving and spending continues for a long period of time, it can create a sore in the Chinese economy. Weak demand in China is likely to push the economy to the brink of deflation. Weak performance in key sectors such as retail, real estate and industrial production has increased pressure on the government to implement further stimulus measures. The impact of the Covid19 measures, regulatory constraints and geopolitical risks have exacerbated the situation and a more comprehensive economic policy seems necessary. Much more ambitious economic policy focused on stimulating consumer demand, including expansionary fiscal policy or household tax cuts, will be needed. Global consumption begins to fall. But China, as a large producer, is more likely to come through with even less damage.
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