Are China’s Consumers in Trouble?

Disappointing retail sales have analysts debating whether consumption is heading for a bigger slowdown

By Nathaniel Taplin




China’s annual Singles Day sale, the gargantuan spree spawned by Alibabaevery Nov. 11, is just six weeks away. But local chat rooms are alight with talk of a Chinese “consumption downgrade.” After years of analyst enthusiasm for the country’s rising consumer class and the companies that serve it, should investors be worried?

In short, yes—although less than “downgrade” implies. Chinese consumers are set for some pain: The trade war with the U.S. will likely hit the labor-intensive export sector, while sectors like autos have been struggling as tax breaks expire. Still, China’s labor market has actually been looking up recently. And households are adding debt slower than over the past two years, meaning more income available for consumption.

One reason consumption and retail sales were weak in 2017, even as urban wage growth accelerated, was Chinese consumers’ enormous borrowing binge, much of it for mortgages encouraged by Beijing. In 2016 and 2017 household borrowing grew by the equivalent of 10% of gross domestic product.


It continues to rise, but the pace has slowed dramatically: Consumer loans at the end of June were up from a year earlier by just 3% of GDP, half the pace of the previous 12 months. That should leave Chinese households more money for discretionary items, and consumption growth did tick higher in the second quarter, although retail sales—which exclude spending on services—haven’t yet shown much of a bump.


Happy Singles Day!
Happy Singles Day! Photo: china stringer network/Reuters 


China’s labor market is also holding up surprisingly well, in part due to the continued strength of the property sector. Services and construction companies together added jobs at the fastest pace in 21 months in August, according to China’s purchasing managers index. Manufacturers are still cutting jobs, but at the slowest pace since early 2017. The improved employment picture could drive some rebound in retail sales and general consumption in late 2018.

Next year things could get trickier. Earnings growth is slowing even before the big U.S. tariffs really hit. And industrial profits excluding the capital-intensive materials sector—one of the best leading indicators for incomes, according to Gavekal Dragonomics—are also weakening. Slower profit growth will eventually start hitting wage growth too.

China’s consumers are doing fine for now. But for Chinese consumer stocks, down 20% for the year, any Singles Day-led bounce in the months ahead might prove fleeting.

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