One narrative that emerged when the global impact of COVID-19 became apparent was whether countries and companies who have been relying on China as their supply chain should leave or diversify. Since then, both the U.S. and Japan have been pushing their companies to leave China and manufacture at home or elsewhere -- the U.S. with rhetoric only for now, Japan with real money. (I’ve written about this a month ago as well, analyzing the various tradeoffs and arguing for a more prudent, less knee-jerk approach.)
The supply chain side narrative will take many months, if not years, to play out. Meanwhile, another side of China’s economy may have a more immediate impact in stabilizing the global economy towards an eventual recovery: the Chinese consumers.
China’s consumer base has been growing steadily, along with the rest of its economy, for the last four decades. More recently, this increase is occurring in the backdrop of a shrinking middle class in many OECD countries, including the U.S.
As China’s GDP falls by 6.8% in Q1 2020, the first ever contraction since China started keeping score, it will need its own consumers to spend. The world may need these same consumers to spend.
Generational Attitude Towards Spending
The general opinion of the Chinese middle class consumers is that their savings rate is quite high, about 5-times higher than their American counterparts.
But no consumer base or population is a monolith. To better understand the Chinese consumers, it helps to break them down into three generational buckets -- people born before 1970, between 1970 and 1990, and after 1990.
This breakdown may be too general for some of your likings. In fact, the common way ordinary Chinese chatter about generational divide is every five years -- born after 1985, 1990, 1995, etc. But for our purpose of analyzing and projecting broad consumer behaviors, three large buckets are sufficient. Excess precision can sometimes undermine analytical clarity.
Before 1970: This generation grew up poor, experienced a lot of political upheavals and economic crises, but also drove the initial stage of China’s opening and reform. This participation and timing created some wealthy outliers, like Jack Ma. Most of them, who simply played along, earned a so-called “xiao kang” life, which is a modest but comfortable living. This generation saves a lot, matching the stereotypical perception, and for good reasons. They are now heading into retirement, and many are shouldering the cost of taking care of their aging parents (in their 80s and 90s), helping their adult children with education or buying their first residential property, and saving for their own healthcare as they approach their golden years. They do travel, enjoy life from time to time, but rarely in extravagant ways.
Between 1970 and 1990: This group grew up less poor, more comfortable, but psychologically mindful of being poor, perhaps from seeing their parents’ experiences and hearing their stories. They are entering their prime earning age, starting young families, and facing the mounting cost of real estate, education, and upkeep of respectable living. This cost is especially acute for the ones living in first-tier cities. COVID-19 is likely the first large-scale economic crisis they’ve faced since China emerged from the 2008 financial crisis mostly unscathed. They are less frugal than the before-1970 crowd, but also circumspect and prudent when it comes to spending, due to their parents’ influence and the harsh reality of a highly competitive modern Chinese society.
After 1990: This bucket, as you might’ve guessed, was born into the most wealth and comfort. They are digital natives, well-traveled, self-assured, and optimistic. The “poor China” is just another page to gloss over in the history books. They have spending behaviors that most resemble the stereotypical American -- free-spirited with little savings. COVID-19 is also the first big economic crisis in their lifetime, but most important, they are also the first batch of university graduates and recent graduates heading into the most uncertain job market the world’s ever seen. Graduating during a crisis usually ends up coloring an entire generation’s outlook and attitude, regardless of the country; case in point is the college graduates in America during 09/11 and the 2008 financial crisis.
Admittedly, this categorization and analysis do not account for many factors, among which are the many poor people living in China today, mostly peasants in the rural regions or migrant workers on the outskirts of urban areas. Though to assess a topic as large as to whether consumption can help fuel a global economic recovery, the middle class is what’s relevant, as cold-hearted as that may be.
By overlaying these generational differences toward money and spending with the entire size of the Chinese middle class, roughly around 400 million people, we can glean some clues and signals into whether, where, and how much the Chinese consumers will spend after COVID-19.
Subtle Signs of Recovery
Already, there are signals, albeit subtle signals, that all three of these generations are continuing to spend in their own ways, even while the coronavirus is far from being controlled and cured.
Certain direct-to-consumer makeup brands, like Perfect Diary, are growing; this signal points to the after-1990 crowd. Online education companies are also growing; this signal points to the between-1970-and-1990 crowd, many of whom have young kids. Online grocery delivery is unsurprisingly also picking up growth; because this is an essential service, this signal likely points to all three buckets, but notably the before-1970 group, who may not be digital native, but are increasingly digital proficient in doing essential regular activities, like ordering grocery, directly from their smartphones.
Leading Chinese domestic players in these verticals -- direct-to-consumer brands, online education, and grocery delivery services -- are receiving new infusions of venture capital funding in the last few weeks. Chinese VCs voting with their capital is a noteworthy signal. It’s more telling than reports from the media, which have their own pre-baked narratives to drive, or online videos of malls either full or empty, especially when a big chunk of China’s commerce happens online. These deals are resulting in higher valuations for the companies, some almost doubling, so they are not cases of bargain hunting.
There is also a strong expectation from outside of China for Chinese consumers to spend on foreign goods and brands. Some European fashion brands have already been scrambling to launch on Alibaba’s Tmall, the main entry point to the Chinese market for foreign brands, when they saw demand in Europe plummet as COVID-19 spread there. As The Information’s reporting observed:
“If the pandemic severely hurts demand in the U.S., Japan, and Europe, global businesses may have to rely even more on the Chinese market.”
Thus far, there’s not enough information to show whether and why Chinese consumers are resuming their buying of foreign brands and goods, often considered a luxury, like they’ve been doing before.
It’s too early to conclude that any of these signals, though welcoming, indicate a trend. It’s also unrealistic to expect the entire Chinese middle class, assuming it doesn’t shrink, to return to its previous spending level. Furthermore, there are two big unknowns that determine to what extent the Chinese consumers will play a role in the global stabilization and recovery process: employment level and patriotic buying.
Employment Level: This unknown is shared by every country, but most acutely for the U.S. and China, given how interconnected these two economies are, even with the recent spate of trade wars. Broadly speaking, manufacturing in China makes up about 40% of its economy, and much of that is dependent on orders from non-Chinese companies. If foreign demand falls meaningfully or disappears intentionally, as the narrative to move supply chain hopes to validate, China may have to encourage spending to keep manufacturing, but also keep manufacturing to boost employment, so people have money to spend. It’s a vexing chicken or egg conundrum.
Some observers believe the Chinese people’s high savings rate will give them the cushion they need, without the type of direct cash stimulus that is happening in countries like the U.S. and Canada. That sadly isn’t the case for many of the after-1990 group, who are not habitual savers, least competitive in the jobs market right now, and may end up living off of their parents’ savings, which have many existing demands already.
Patriotic Buying: Even if we put on the rosiest of rose-colored glasses and see a Chinese middle class fully recovered and growing like before, where will their money flow to is a big question. This uncertainty is couched in the existing trend of retreat and animosity towards globalization, which has accelerated since the coronavirus outbreak. Nationalism is on the rise everywhere; people are looking for people to blame. This international finger-pointing is fueled by some national leaders, who would rather fan conspiracy theories to deflect blame than own up to their responsibilities. In both the U.S. and China, consumerism has always had a strong patriotic flavor. When Huawei was at the crosshair of the U.S.-China trade war, its smartphone sales received a big boost from Chinese consumers. Americans have done their fair share of patriotic buying in the last couple of decades, often beyond their means.
Xenophobia, disguised as public health measures, is on the rise everywhere. Professional observers may categorize these machinations as political chess games of the most cynical type, and they are not wrong. But ordinary consumers, regardless of nationality, don’t really care. Consumers buy what they need and what makes them feel good. The Chinese middle class was large before COVID-19 and may become the largest by spending capacity after COVID-19, depending on how other countries fare in this crisis. Whether we like to admit it or not, what will make the Chinese consumers “feel good” may determine which sector, market, or economy will recover.