Are Chinese consumers heading into a "Lost Decade" similar to Japan's?
Why are Chinese consumers spending less?
Last week, I chatted with a family friend who distributes imported goods to marketplaces and major retail chains in Jiangsu, one of China's richest provinces. She was pretty straightforward when I asked about the consumer outlook for 2024 in China. "We're already in a deflation, barely making a profit, and we have to deal with middlemen taking their cuts, and there's hardly any profit for them either," she said. She also mentioned that "This year's March 8 sales were even worse than last year. Consumers are mainly stocking up on cheap necessities like tampons and detergents, and you see a significant drop in sales as soon as the promotional period ends." (Note: March 8, International Women's Day, is typically a key date for commerce promotions in China.)
Last year, a wave of layoffs and salary cuts swept through the finance and real estate industries, forcing many young white-collar professionals, including myself, to confront probably the toughest economic conditions they have ever faced since they were born. As fears of "near deflation" loom and hopes for a salary increase appear dim, it's no surprise that consumers in China are increasingly discussing ways to save rather than spend.
The "post-Covid revenge shopping" didn't materialize in 2023, and by 2024, consumers seemed to have adopted an even more rational approach, moving away from the exuberance of 2021. This shift is leaving a lasting impact on consumer mindsets, with "shopping rationally" emerging as a new value proposition.
Engagement with the topic of "consumption downgrade" has surged on Chinese social media platforms like Douyin and Xiaohongshu in 2024. On Xiaohongshu, China's Pinterest-like lifestyle social media platform, many netizens are not exactly discussing how to find the cheapest options but are sharing insights about "demystifying" luxury products and high-end appearances. Some are saying, "It's not about being rich or poor. I have actually become happier by not being captured by consumerism and living a simpler life."
One cannot help but be reminded of Japan's "lost decade," with so many elements like the real estate bubble burst, a deflationary period, and a noticeable decline in consumer enthusiasm, a declining birth rate, all screaming similarity. Among my generation of young Chinese born in the '80s and '90s, the term "平成废柴" or "Heisei Wastrels" is gaining traction. This label, borrowed from Japanese netizens, was used to describe Japan's Heisei era generation, marked by their perceived lack of ambition and enthusiasm during economic stagnation from 1989 to 2019.
Similarly, many among us are drawing parallels to the "佛系" or "Buddhist-style" mindset, a trend of disengagement from societal expectations, minimalism, and a focus on personal interests at one's own pace. (Interestingly, the concept of "Buddhist style" also originated in Japan and was later adopted in China, becoming widely popular since 2018. )
So, why are Chinese consumers spending less? And does that indicate that Chinese consumers are heading into a "Lost Decade" similar to Japan's? The quick answer is that I personally don't think so, but let me go through a couple of observations on this topic with you in today's newsletter.
Towards value-oriented spending
On an aggregated level, Chinese consumers technically did not spend less. Overall retail sales grew by 7.2% year-on-year in 2023. However, price-for-value is increasingly becoming an important factor in any purchase decision. Across the major online e-commerce platforms we track, most categories witnessed a decline in the average selling price, with digital electronics as the rare outlier.
But the "value" could mean different things for different people
The middle-class consumer
One thing I've noticed is that "price-for-value" doesn't mean Chinese consumers are losing the desire to shop for discretionary items, nor are they always seeking the lowest possible-priced products. Not everyone is adopting that "Buddhist style" and switching to a minimalist lifestyle altogether: for one thing, middle-class young consumers, although impacted by the slow salary increase outlook, still desire luxury items, only with a more manageable budget.
On social media, the percentage of posts mentioning "second-hand listings" for luxury brands started to soar at the beginning of 2024. This indicates that middle-class consumers still want luxury bags, even though they have clearly shifted towards more responsible spending.
Hermes, Gucci, and Chanel, brands perceived by Chinese consumers to better retain their value, became the most popular. Middle-class consumers are seeking handbags that not only satisfy their desire for a luxury brand logo but also serve as an "asset" to preserve value. The "affordable" luxury brands are the most impacted, as some consumers would rather spend more to buy a second-hand Chanel that retains 90% of its value in the secondary market, than purchase a brand new Loewe, Michael Kors, or Tory Burch, for instance.
Among middle-class consumers, priorities have clearly shifted. Across major e-commerce platforms, there has been a noticeable cooldown in purchases related to expensive "elite" sports, such as golf and horse riding, as many middle-class parents are thinking more "rationally." (In China, these sports are usually more expensive and popular among wealthy families, in contrast to the USA, where they are more accessible to the ordinary middle class, such as playing golf, for instance.)
Meanwhile, consumers are still spending on "affordable fun" activities, and you see many "niche" sports like outdoor adventures, climbing, diving, and cycling gaining traction throughout 2023.
"去魅" which translates to "demystify," has become trending jargon among netizens who realize that many high-profile products are not worth the money they pay. Just as many middle-class consumers are abandoning expensive logos and sports upon realizing that consumerism does not contribute to a fulfilling life, similar mindsets are now expanding to many categories. Consumers are looking to "buy something that actually works" instead of "buying the expensive just to show off" or "buying a bunch of cheap things that are useless." (And I think that's great.)
For instance, in our previous study of China's digital payment panel (WeChat Pay & Alipay), we noticed that middle-class consumers are holding back from buying expensive luxury skincare products but are investing more in aesthetic medicine treatments, which maintained double-digit year-on-year growth in sales even through the COVID lockdowns in 2022 and into 2023. Some consumers are saying, "I would rather spend big money on monotherapies because they actually work, but I'll never buy expensive facial masks from big-name brands. Basic medical masks are good enough for me." Such a mindset has greatly helped the sales of domestic companies like Giant Biogene, whose medical masks offer basic efficacy, such as hydration, at a cheaper price. (Giant Biogene HKG.2367 has already gained 30% year-to-date, despite the overall low sentiments toward the Hong Kong stock market.)
Chinese parents
Although China's policy overhaul in 2021 banned private after-school tutoring for core subjects in primary and middle schools, the demand for education remains strong. For Chinese parents, the priority of education has always remained top-tier. Digital electronics is one of the few categories that saw an increase in the average selling price in 2023. Educational electronic devices, such as tablets for learning and translation pens, have largely driven the sales of digital electronics.
The wealthy
One impression that I got from chatting with business owners or high-net-worth families recently is that some consumers who are less impacted are spending less simply because they feel "products" are becoming increasingly undifferentiated. Some are saying, "I don't want to buy things simply because there's nothing new for me to buy."
This may sound jarring, but getting wealthier consumers to buy is indeed more difficult than before. In the past decade, the logo and limited offerings from high-profile luxury brands alone could be enough to attract the wealthy to buy, but as it becomes less uncommon for the middle class to own such items, the logo itself is not enough.
One noticeable shift is that the wealthy are opting for "logoless" and more understated fashion statements. "Quiet luxury" has gained traction in China, and you see brands like Loro Piana, which is a good example of "quiet fashion," emerging as the new favorite among the wealthy Chinese. In Beijing (where I am based), many half-jokingly say things like, "If you wear clothes and bags with recognizable logos from top to bottom, I won't necessarily consider you from a wealthy background. Those who wear Uniqlo and go casual may be the secret tycoons who own 10 real estates in Beijing."
Wellness is the new fashion
The awareness of wellness has shifted consumers' spending behaviors. For instance, we see more consumers opting for traditional "rice wine," which is valued for its health benefits in Chinese medicine, and zero-sugar & diet alcopop spirits drinks, as they seek healthier options to enjoy a tipsy evening.
In our previous post, we explored how Chinese businessmen are shifting their focus from pure money-making opportunities to personal well-being, including weight loss, anti-aging, and overall health. This shift has sparked a surge in the purchase of semaglutide. Discussing health and personal well-being has almost become the new trendy thing to do.
Many Chinese consumers now describe their lifestyle choices as "Buddhist style," a term often associated with losing ambition and "quiet quitting", as many would assume. Some who are discouraged are indeed "quiet quitting", but many are simply using the term interchangeably with "living at one's own pace and focusing on wellness." In fact, young professionals are actually reprioritizing their life priorities and preparing for the future — That's the only wise thing to do when the economic cycle is not in a position to chase quick profits.
We're not living in an era of lost ambition—this is a key distinction from a stagnant, deflationary environment. In fact, most people still believe that hard work will lead to opportunities and a better life; they are just choosing to pace their efforts more wisely. Many young professionals and businesspeople in China, like myself, often joke, "I'm prioritizing sleep, health, and workouts because when the economy picks up again, I'll need a healthy body to compete with those born after the 2000s."
*I have lots of stories and data points on how young Chinese are challenging the traditional definition of having a "good & stable job" in state-owned corporations and the typical "996" work-life in a big Internet company, yet still maintain an economically fulfilling and happy work life. Let me know in the comment section if you are interested in seeing some of that covered!
The lower-tier cities: future growth engine
Apart from social sentiments, population structure is another key difference. China has 1.4 billion people, with 500 million just having surpassed the middle-income mark. (In contrast, by 1995, Japan already had 80% of its population classified as middle class.) There's significant potential for growth, especially in lower-tier cities where many still need to catch up economically and are likely to drive consumption demand over the next decade.
Reverse migration is enabling the vast majority living in 2nd and 3rd-tier cities to enter the middle class as career opportunities and affordable housing attract young adults to suburban cities and county towns. Manufacturing jobs in particular, are creating steady jobs for the lower-tier cities as the industries and infrastructure investment shift inland.
"Big city" consumer habits are also spreading to smaller locales. For instance, Lululemon, one of the first foreign brands to invest in establishing a presence in lower-tier cities, launched its first Douyin live show in October 2023. We found that Lululemon's subsequent livestream sessions attracted new users from provinces with fewer stores or even from low-tier cities without any Lululemon offline stores, such as Taizhou, Zhenjiang, Weifang, Jining, and Baoding.
It's easy to equate "value" with a high price tag. When the prices of products drop, it's natural to wonder if consumers are stuck in a deflationary loop and cutting back on spending.
In my opinion, it's time to rethink the notion of "value." When the economic cycle slows down, stepping back from consumerism is a natural response. This period prompts people to reassess what truly makes life meaningful. A slower pace of life encourages reflection and broadens our understanding of what is "valuable." (If you read the comment sections under the "consumption downgrade" posts, you'll find many people are not venting, but are genuinely sharing thoughts on consumerism and values beyond material things.)
However, "overcapacity" remains a real concern. The anecdote about how my family friends struggle with the profitability of imported products highlights a looming issue for many merchants and manufacturers in China. The growth driven by intense competition and a lack of innovation is unsustainable. (We recently posted a story discussing these issues faced by China's manufacturing sector here).
In China, the common approach is to excel by following established rules and maximizing opportunities within existing systems. If something works, we tend to maintain the status quo and allocate resources to industry leaders so that growth can be maximized.
In the past decade, being the "global factory" and focusing on lowering prices made enormous money for Chinese manufacturers, overshadowing the benefits of taking the risk to innovate. But now, it's time for Chinese enterprises to innovate and "create outside the box." This shift is happening as some have already realized its importance, and others will just have to adapt simply because there is no other option.
There are indeed many creative developments happening in China, often "micro" innovations by grassroots entities that integrate existing products and services with a twist of new features. (The aforementioned educational electronics is one great example of how Chinese manufacturers can quickly capture a trend, iterate product design, manufacture, and supply it to domestic consumers, get feedback, and improve again.) I cover some of these creative designs and product scenes in my personal newsletter.
We are at a crossroads where innovation must occur. It will be an inevitable, yet very painful, paradigm shift, especially for those who struggle to adapt. However, the increasingly "diverse" values among consumers will create niche markets where merchants can innovate products and services to meet specific demands, thus earning more profit instead of continually lowering prices. Meanwhile, the vast lower-tier regions will serve as the engine for incremental growth.
And the ability to innovate and boost profit margins is becoming the determining factor in whether domestic consumption can rebound after the current period of low activity, or if China will slide into an even longer-term period of stagnation and deflation.
Today's newsletter primarily explores recent consumer sentiments. For readers interested in a more macroeconomic analysis, we've translated insights from Ting Lu, the chief China economist at Nomura Securities. His analysis highlights three key differences between China's current economy and Japan's economy in the 1990s. You can read it here.