Why China’s domestic demand is worrying when Pindo is on fire

On July 15, China’s National Bureau of Statistics announced that GDP grew 12.7% year-on-year in the first half of 2021. However, the after-effects of the epidemic have not been completely eliminated. The low-income population lacks adequate subsidies and care, and unemployment is largely underestimated and neglected. Although first- and second-tier cities were relatively lightly affected by the epidemic, the post-epidemic period saw shrinking domestic demand and consumption downgrading in a wide range of small and medium-sized cities, in stark contrast to booming industrial production and investment.

A year and a half has passed since the outbreak of the new crown outbreak in Wuhan, China, in late 2019. China has made the Chinese government proud internationally by relying on a policy of severe blockade and quarantine, which has been relatively successful in achieving a short-term recovery of its national economic operations and industrial chain. on June 29, the World Bank in China released its China Economic Briefing, which predicts that China’s economic growth will reach 8.5% this year.

Consumption share of 289 prefecture-level cities in China, H1 2019-2021 (Produced by anonymous person, data from Economist Intelligence Unit/National Bureau of Statistics/Wandai)

Chinese e-commerce companies blocked by Amazon can only make big profits by going abroad

The spring and summer of 2021 was supposed to be a joyous carnival for a large number of cross-border e-commerce companies in southern China: in the U.S., there was Mother’s Day in May and Father’s Day in June, followed by Amazon’s big membership sale. However, on Mother’s Day, May 9, AUKEY, a leading Chinese cross-border company, was blocked by Amazon on its US, UK and European sites. This is just one round of Amazon’s recent blocking spree against Chinese e-commerce companies. So far, the so-called “Shenzhen cross-border five tigers” of e-commerce, in addition to Anker (ANKER), the other four AUKEY (AUKEY), TOMTOP (TOMTOP), Zebao (SUNVALLEY), PATOZON (PATOZON) all blocked.

The main reason for Amazon’s fierce hand is that a large number of Chinese cross-border sellers brought their common behavior in China to foreign countries: in order to pursue traffic false brush, send gift cards to buyers in exchange for good reviews. This is an uncompromising fraud on Amazon’s platform, so the merchants were severely punished by Amazon. As of this writing, the blockade tide is still going on, involving electronic products, home health, clothing and beauty categories, a time when the major cross-border e-commerce in Shenzhen a wailing.

“Sequestration is certainly a fatal blow to large enterprises. In Amazon, a two thousand dollar bed can be easily sold. In China, high-end products really can not, can not sell. Now the young people, are Poundland to buy a few dollars on the shelf ah, a small desk ah, curtains ah. The sales price is not comparable to that of the sea,” Tina Wang, a consultant for a Hong Kong advertising agency who has long studied e-commerce, told the Voice of America: “The government recently said that the internal cycle, the double cycle, the internal digestion of the export can not be digested, it is simply impossible to digest. We are now downward consumption, income downward, even if not downward there is no domestic market. The e-commerce business think of all first foreign markets. It is very difficult to do in the domestic, low profits, can only spell shoddy products.”

China’s domestic consumption growth from a few years ago has begun to show weakness. Data from the National Bureau of Statistics show that year-on-year growth in total retail sales of consumer goods has fallen below 10% since 2018: 8.8% in 2018, 8% in 2019 and turning negative (-3.9%) in 2020 because of the epidemic. According to the latest statistics of July 15, in the first half of this year, the retail sales of urban consumer goods amounted to 1,840.98 billion yuan, with a two-year average growth of 4.4%; the retail sales of rural consumer goods amounted to 2,780.7 billion yuan, with a two-year average growth of 4.0%.

Depressed domestic consumer demand and consumer downgrading

Mr. Zheng, who is almost 60 years old, has been doing wholesale clothing business for nearly 30 years in Chengdu’s Jinniu District’s Hehuachi Garment Wholesale Market, with customers mainly from small towns around Chengdu. After the epidemic, his clothing sales fell by nearly 70%. “The last two years have been the worst two years for business,” he said: “Many customers have simply closed their stores and are not doing business. People are broke and don’t even buy clothes that cost a few dozen dollars.” The price increase of raw materials and staff wages has kept him in the red, but Zheng is still struggling: “Many workers have been with me for 20 years, otherwise it would have been disbanded. Now I can only give them a long vacation.”

Faced with such a difficult situation, Mr. Zheng took the initiative to downgrade his consumption: he used to play mahjong for 50 yuan to start, but now it has become 5 yuan to start; he used to be able to spend 300 yuan a night to buy lottery tickets, but now he can only spend 10 yuan to buy. Even the dance halls they frequented before the epidemic are now less frequented.

Zhang Hong (a pseudonym), an economist who works at an investment bank in Beijing, told the Voice of America, “Domestic retail sales are now 8 percent higher than they were before the epidemic. But compared to other industries, the consumer sector looks particularly depressed. Industrial production is up 20 to 30 percent, but consumption is only up 8 percent, which reflects the lack of domestic demand. If you compare, before the epidemic, consumption accounted for 60 percent of economic growth. That is, 60 percent of the growth was from consumption. But last year the share of consumption, that is, the contribution to the economy, was negative. That means people aren’t consuming. Now half of the growth comes from exports and half from domestic investment. This year, consumption has recovered to some extent, but still not back to the proportion before the epidemic. People are not as motivated to consume as they are to produce in factories.”

A July 14 article in Caixin said the current degree of economic fragmentation in China is perhaps the most severe in the past few decades, with some cities and regions experiencing a double dip in consumption. “Four of China’s 28 provincial capitals have already posted negative year-on-year growth in total social retail sales in May. These cities had never experienced negative growth before the epidemic, and even last year when the epidemic was severe, there were only a few months of negative growth. The fact that these cities saw negative growth again in May is a noteworthy sign.”

Voice of America did a comb of China’s first-, second- and third-tier cities in terms of consumption share in recent years. The results, compiled from publicly available data, show that inside the four Tier 1 cities, 33 Tier 2 cities and 252 Tier 3 and 4 cities, the share of consumption in Tier 3 and 4 cities, which account for the bulk of the volume, shrank from 52 percent in 2019 to 44 percent in the first five months of 2021.

Zhang Hong said, for example, “like Henan Anyang, the local sale of clothes and shoes, can go out of business are down. Everyone buys things from Poundland. Pindo is very cheap, and there are often brands dumping goods. The brick-and-mortar stores in small cities are being hit hard. Originally the epidemic was a temporary difficulty, but now it has become a permanent difficulty, all closed down.”

The tobacco and alcohol industry, a non-essential product, had already started to show a decline in sales before the epidemic. According to data released by China’s National Bureau of Statistics, the cigarette industry’s peak production was in 2015 (2.59 trillion sticks). Production in the cigarette industry has declined rather than increased in the following years, with production falling to 2.38 trillion sticks in 2016 and remaining at 2.38 trillion sticks in 2020, while the figures for the first two quarters of 2021 are essentially the same. Liquor production peaked in 2016 (13,583,600 kiloliters) and then dropped wildly all the way to 2020, with production almost half of what it was in 2016. liquor production started to rebound in the first five months of 2021, but not significantly.

If a major reason for the slump in the tobacco and liquor industries comes from the fight against corruption, the sharp decline in beer production may better explain the weak consumption of the “lie-flat generation”. After reaching a peak in 2013 (50,615,400 tons), beer production began to decline steadily year after year, reaching only 34.11 million tons in 2020, a 32% drop compared to 2013. In the recovery period after the epidemic, if we look at beer production in May alone, 2021 falls 12.5% and 2% compared to 2020 and 2019 respectively.

Commenting on tobacco and alcohol sales, Zhang Hong said, “Tobacco and alcohol are not part of the necessities of life, but once tobacco and alcohol sales drop, it generally indicates that this atmosphere is different and that business activity has dropped. Because the occasions of doing business in China, tobacco and alcohol are the most. Tobacco and alcohol personal consumption is more stable, the difference will not be too big. In fact, this reflects the business environment is not as active as the original.”

Wang Huan (a pseudonym), who lives in Yangzhou City, Jiangsu Province, has been running a preschool early education institution for almost 20 years and made a lot of profit in the early years. In her opinion, the industry has lost its initial sharpness in the past few years. “This year the performance is much worse, at least 30 percent less,” she told Voice of America. “The birth rate was already declining, there are fewer children, the economy is down after the epidemic, and people are refusing to spend money, especially on education and enjoyment. Even I myself have downgraded my spending!” In July, she also suffered another fatal blow: the state began to vigorously rectify out-of-school education institutions, and the local consumer rights protection office fined her for “unfair contract terms”. Wang Huan finds it difficult to make ends meet: “Sometimes I just want to sell the institution, it’s too tiring to earn money.”

The underestimated and neglected unemployment rate, the people who have lost their purchasing power

China’s statistics on unemployment have been criticized by outsiders because the official data only observe the urban unemployed population. Most of the unemployed do not go on to collect the meager unemployment insurance benefits, and those who lose their jobs in the cities and return to the countryside are ignored from the official statistics, resulting in an actual unemployment rate that often differs greatly from reality.

On January 18, 2021, Ning Jizhe, director of China’s National Bureau of Statistics, said at a press conference that 11.86 million new jobs were created in urban areas nationwide in 2020, exceeding the annual target. The national urban survey unemployment rate averaged 5.6% for the year, below the expected target of around 6%. The latest data from the National Bureau of Statistics (NBS) on July 15 showed that the national urban survey unemployment rate was 5.0% in June this year.

However, Yao Yang, an economist at Peking University, said in an interview with Tencent Finance at the end of 2020 that a team from Peking University’s National Development Institute had done a survey of more than 6,000 people at the end of June 2020, which showed an unemployment rate of 15%, in addition to 5% being in a semi-unemployed state.

Zhang Dandan, a professor of economics at the National Development Institute of Peking University, also wrote in May this year that according to the team’s tracking surveys in June and November 2020, “the group of people in long-term unemployment in urban areas nationwide in 2020 is likely to have exceeded 8 million. In short, China’s unemployment rate has experienced a great ups and downs of rising and then falling, and the overall situation is not that optimistic.”

Zhang Hong believes China’s epidemic subsidies are not taking care of consumers enough: “The latest data now is that retail sales in China are 8% higher than they were before the epidemic. The U.S. is 20 percent higher. The difference is that China does not subsidize consumers, while the U.S. is directly subsidizing consumers. China’s money is going to subsidize businesses, hoping they will provide jobs. But in fact, companies do not provide many jobs. It ends up leading to a rather slow recovery in consumption.”

“People with low incomes actually have the highest propensity to consume. In fact people with high incomes, consumption wasn’t really affected in the first place. And then the stock market real estate was okay, they actually got more money, but those people wouldn’t have spent as much extra. But those people at the bottom, if given an extra thousand dollars, they may all consume it. Now it’s just not that extra thousand. In fact, the fact that Poundland is so hot in small towns also shows the regression of people’s living standards.”