Weak consumerism in China is “a problem for everyone” by Investing.com

Investing.com — China, long hailed as a powerhouse driving global economic growth, is now facing a decline in consumer confidence and spending, analysts at Piper Sandler said in a note.

The forces behind this shift—from a troubled housing market to a sluggish labor environment—are not only reshaping China’s domestic economy, but are also casting a long shadow over the global economic landscape.

“While weak housing and inventories depress confidence and consumption, Beijing is determined to keep factories open,” said analysts at Piper Sandler.

For years, real estate in China has been the cornerstone of wealth accumulation and economic vitality. However, as property values ​​fall and share prices remain under pressure, household wealth is shrinking, leading to a significant drop in consumer confidence.

This loss of confidence translates directly into reduced consumer spending – a worrying trend for an economy that has increasingly relied on domestic consumption for growth.

Compounding this problem is China’s weak employment landscape. Persistent labor market challenges are fueling uncertainty among consumers, who are responding by saving more and spending less.

In fact, savings rates have reached record levels, a clear indication of the pervasive anxiety among Chinese consumers about their economic future.

This further limits economic activity, creating a vicious cycle of low confidence, high savings and slow spending.

The ramifications of China’s weak consumer base extend far beyond its borders, creating ripples in the global economy.

As Chinese consumers tighten their belts, the ripple effects are being felt by countries and companies that have come to rely on Chinese demand as a key driver of growth.

Reduced consumer spending in China means lower demand for imports, which in turn affects global trade dynamics and stifles economic growth in other nations.

In addition, China is currently experiencing overstocking in both consumer goods and industrial goods.

This surplus is not just a domestic problem; poses deflationary risks for global markets as well.

With excess commodities building up, there is increasing downward pressure on prices, which could trigger a deflationary spiral in global markets, further exacerbating global economic challenges, Piper Sandler said.

Luxury markets are also feeling the strain. China, once a major force in global luxury spending, is seeing a decline in opulent consumption.

Chinese appetite for high-end goods has waned, posing challenges for luxury brands that have traditionally relied on the Chinese market for a significant share of revenue.

As Chinese consumers grow more cautious, these global luxury brands are facing declining sales and financial pressure, underscoring the far-reaching impact of China’s economic slowdown.

The auto industry provides a clear example of the mixed effects of China’s economic downturn. While China’s robust portfolio of electric vehicles (EVs) provides some impetus, the broader auto market is struggling.

Declining consumer spending, coupled with a strong “Buy Chinese” campaign, creates a difficult environment for foreign automakers.

This change in consumer behavior leads to a loss of market share for foreign brands and puts pressure on their profitability.

The consumer discretionary sector is another area where the impact is strongly felt. US companies with significant exposure to the Chinese market have seen their performance suffer as the slowdown in consumer spending in China takes its toll.

Economic uncertainty in China is dragging down the financial results of these companies, underscoring the interconnected nature of global markets and the particular vulnerabilities of multinational corporations that depend heavily on Chinese consumers.

Amid these economic challenges, China’s political environment leans more towards regulation than stimulation. In recent months, the Chinese government has introduced a series of new regulations instead of taking aggressive steps to boost growth.

This regulatory focus, while aimed at maintaining control, contrasts sharply with the need for economic stimulus in the face of a slowing economy.

The lack of substantial easing measures suggests Beijing is prioritizing stability over aggressive economic expansion, even if growth remains sluggish.

In the long term, China faces formidable challenges. Several factors are weighing heavily on the economy, including the bursting of the housing bubble, worsening demographics and declining foreign direct investment.

These structural problems are likely to persist, making it difficult for China to regain its previous economic momentum.

While a financial crisis seems unlikely given the tight control exercised by the Chinese government, ongoing pressures are likely to continue to push global growth, especially for multinational companies that have counted on China as a key growth engine.