How China’s middle-class belt-tightening will impact the world
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Plus, our listeners get an extra $30 off with promo code HOLIDAY. That's 50% off at omahastakes.com. And an extra $30 off with promo code HOLIDAY. Minimum purchase may apply. You're listening to a podcast from the South China Morning Post. That is an outburst from China's lipstick king Li Jiaqi when he was promoting an eyebrow pencil.

But why is he so upset? Why do you think it's expensive? It's been sold at the same price for the past few years. Don't lie through your teeth. Chinese brands are having a difficult time.

It was a response to a fan who had complained that an US$11 eyebrow pencil Li promoted was too expensive. What Li said next angered many letizens. Sometimes you should see if the reason lies with you. Has your salary risen in so many years? Have you been working hard?

That's lip of the tongue, calls the lipstick king, who once sold 15,000 lipsticks in 5 minutes, his crown. He lost 1 million of his 30 million followers overnight. State broadcaster CCTV published an op-ed saying live streamers who battled with consumers were destroying their own rice bowls. But why did these comments upset so many Chinese consumers?

How does a social media storm reflect the changing consumer sentiment and the economic outlook in mainland China? I'm Thomas Yao. For this episode of Inside China, I'm joined by Jiang Yaling, a consumer analyst based in mainland China. Yaling, thanks for speaking with us. What is the general mood among Chinese consumers given all the news about an economic downturn and downgraded consumption?

So with consumption downgrade, I think what it essentially means is that people have become more value-driven. They focus more on cost-effectiveness. Some of my friends were saying that they deleted Taobao and Tmall and they only buy on Pinduoduo now because it truly saves them money. And a lot of these friends who I have conversations with are middle-class consumers.

Well, for context, Alibaba's Tmall is sort of like Amazon in China. And just to note, Alibaba is also the owner of the South China Morning Post. Pinduoduo is the wild west of online shopping platforms where you can buy an 85-inch TV for $150 US dollars.

Of course, the reliability of a TV at that price range is another story. Customer decision journey has become a lot longer. So when it comes to durability, price comparison, performance of the products they want to buy, I think such behavior changes happen often.

Not only because of sentiment, not only because they think saving money is cool, but because they really don't have much money or have a lot less money than before. But what is it like to be in the middle of things?

I spoke with Yvonne, who joined one of China's tech giants in 2017, when these companies were known for their extravagant sales events and generous packages. She requested anonymity because she was not authorized to discuss internal company matters. Hi Yvonne, can you recall what it was like when you first joined the tech company? I feel like this organization is a bit...

It was quite out of control. Everyone wanted to create a team because this was the fastest way to be promoted. I remember part of my package includes stock options, and the HR officer told me that the value would only go up, and it skyrocketed. I knew people who cashed in their stock options and bought an apartment without needing a mortgage. At the time, I didn't know if that was normal.

But like all parties, the music eventually stopped. Chinese authorities initiated a regulatory storm targeting the country's big tech firms in late 2020, citing concerns that the major internet platforms were becoming too large and powerful. Authorities halted IPOs,

launched antitrust investigations and fined these tech companies for data security and anti-competition violations. Chinese tech companies, which once rivaled their foreign counterparts in market capitalization, saw their share prices plummet. Yvonne, so what is it like to work in the tech sector now?

Work has become sort of a performance. Everyone just pretends that they're busy working. But I know you're not working, and you know that I'm not working. Everyone knows everyone is not working, but the performance has to go on. You and Li Jiaqi, the lipstick king, are in the same business.

Why do you think that he was in so much trouble over his remarks? I think his remarks represented ethos from the past, which is that hard work guarantees success. In his case, he worked his way up from a salesperson in a department store to become an internet star. But once a lot of people realized that making a living is not that easy, his words became hard to accept.

And how has your consumption habit evolved over the years? When I was not pressured by economic realities like I am today, I was a person who impulsively bought a lot of stuff that I didn't really need. I had a mentality that I deserve better, which translated into buying premium items.

Nowadays, it's a different story. I would wait for a big sale. And there's also a lot of soul-searching when it comes to consumption. Do I really need this thing? Or do I buy it because society makes me feel like I need this?

Is it accurate to say that external factors push these changes in you? Yes, exactly. I would say external factors matter. And I'm also at a different life stage now that I'm married. China's consumer price index in April 2024 grew by just 0.1%, meaning people are not eager to spend and there's an oversupply of goods.

To survive, many Chinese companies are eyeing overseas markets to sell their products such as lithium batteries, solar panels and electric cars And that makes developed markets like the United States and the European Union quite nervous China wants to use manufacturing as the way out of its slowdown

That means that China's share of global manufacturing must grow twice as quickly as its share of global GDP and more than three times as quickly as its share of global consumption. That was Michael Pettis, professor of finance at Peking University, who has long been arguing that China's economic model suffers from an over-reliance on investment-driven growth rather than domestic consumption.

That means for it to be successful, the rest of the world has to agree to increase consumption and reduce manufacturing.

Even if there were no geopolitical tensions, the rest of the world would refuse to do that. But given how tense the geopolitical environment is, it's very clear that that's not going to happen. The US is already expanding its manufacturing shares. So is Japan. India has made it very clear that they will not accept a reduction in their manufacturing share.

By now, most economists, not all, but most serious economists agree that China must raise the consumption share of GDP by raising the household income share.

which is if you raise the household share, you must reduce the share either of businesses or of the government. It shouldn't be businesses. So ultimately, it must be a reduction in the government share. And in China, as you know, there are basically two governments. There's the central government and there are the local governments. And so I think the real discussion, which is not really being held yet,

is which government, will it be Beijing or will it be the local governments that pay for the increase in the household share of income? So Professor, what are the possible outcomes of this economic debacle? Technically there's three scenarios. So rebalancing means that for the next few years or next few decades

consumption has to grow faster than GDP, and investment has to grow slower than GDP. One way that could happen is the good way, which has never happened in history, but it could happen. That is that China implements policies that drive up the growth in consumption to something like 7%. And this would allow them to bring the growth in investment down to 1% or 2% and still have GDP growth of over 4%.

Could they do this? Yes. If they transferred about 1% to 2% of GDP every year from local governments to the household sector, they could do this. SL. So what's the second way?

The second way of adjusting is the way Japan adjusted, and that is that consumption growth drops a little bit, but investment growth drops a lot and GDP growth drops a lot. So in that scenario, consumption growth in China could continue at 4% a year.

investment growth would drop to maybe zero or even negative, but GDP growth would drop to around 2% or less a year. And the first scenario would be? The third form of adjustment is sort of the way the US adjusted in the 1930s. And that is very quickly and very brutally. The US in the first three years of the decade saw GDP contract by 35%.

So you talk about transferring income from local governments to households. In reality, how can we do that? There are many ways they can do that. So, for example, local governments can improve the social security, can improve the pension system, can provide cheap housing. These are all ways of taking resources from the local government to increase the wealth and income of the household sector.

But aren't the local governments not doing so great financially? I mean, some of them are having problems paying local civil servants. From a cash flow point of view, yes, they're in serious trouble because they relied so heavily on the real estate sector as an alternative for taxes.

but don't forget local governments own a lot of assets you know the uh the the poster child of bankrupt local governments is guizhou and guizhou owns many things including they own maotai one of the most valuable companies in china and so the question is do local governments need to own all of these assets no in most countries governments don't own so many assets

Can those assets be transferred directly or indirectly to the household sector to boost household income? In principle, yes. Politically, very difficult to do. So what should ordinary people do in such uncertainties? Well, the problem is that what's best for ordinary people is not best for the economy.

What's best for ordinary people is to be cautious and to increase their savings. But if everyone increases their savings, that reduces demand. And so the whole economy slows down. And in the end, nobody has any more savings. So it's very tough. This is why policy is so important.

Depending on what policies Beijing implements, we could see very very different outcomes But trade war and geopolitical tensions aside, for ordinary people like Yvonne, finding clarity and certainty in such trying times is the key to staying sane Yvonne, you were telling me that you found a way to rid yourself of anxiety and depression

Can you tell me why these emotions are common among your peers? I think it is the disappearance of certainties and a sense of achievements which are brought by a weak economy. Lots of my friends are feeling depressed and anxious, and it has sort of become a trend among the middle class.

I've tried to cope with this by starting my own podcast to talk about random things in life. I produce one episode every week. Through producing a program, I can build a routine. And through that routine, I can find a bit of certainty in my life. And that's how you build a positive feedback loop.

I think Chinese people are very resilient and hardworking, just like me. I believe that they can find a way to heal themselves and keep going.

Whether it is China's young professionals tightening their belts or foreign leaders crying foul over China's alleged overcapacity problem, how the world's second largest economy deals with its slowdown will have huge consequences on its domestic economic health, its international relationships and individual Chinese people's choices. Remember, you can keep up to date on China's economy and more at SMP.com.

I'm Thomas Yao. Thank you for listening.

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