There is heated discussion online as to whether China is experiencing a consumption downgrading. Many claim that household budgets are under pressure, spending is being reduced and prices have become a decisive factor when consumers are faced with similar products.
people are eagerly pointing to evidence of consumption downgrading: pickle mustard, cheap baijiu and instant noodles are most often cited as examples. Some figures do suggest that retail products with lower prices are making a comeback.
Fuling Zhacai, a maker of pickle mustard, reported a first-half net profit of 305 million yuan ($45 million), a 77.52 percent jump. Instant noodle brand Kang Shi Fu said net profit was up 86.59 percent in the first half. Shunxin Agriculture, producer of Red Star Er Guo Tou, which is a liquor widely consumed in Beijing, outshone high-end baijiu brands like Kweichow Moutai and Wuliangye net profit growth of 96.78 percent in the first half.
Numbers like these may seem to signal a consumption downgrading, and to some extent that may be happening, but it is far from the whole truth.
For instance, Fuling Zhacai looks to be in good shape mainly because of price hikes it started imposing from last year. The unit price of pickle mustard is quite low, so if a company lifts the price by 10-20 percent while improving the quality, ordinary consumers can still afford it. But this isn't a consumption downgrading, since consumers get products with better quality despite a higher price. Similar things have happened with other consumer products.
Aside from such micro-economic issues, China's macroeconomic data - specifically, retail sales - grew 8.5 percent or more during the first half of this year. That's more evidence against a downgrading.
Consumption is not downgrading: quite the opposite, it is upgrading. Consumption has been restructured with less spending on products and more on services. A few years ago, having good meals and wearing famous brands brought the most satisfaction to people in China. But things have changed, and more money is being spent on entertainment, education and tourism.
So the concept of a consumption downgrade is not valid. But there are reasons that the term has become popular so fast. Housing prices have soared in recent years, which burdened many families with mortgages and debt. Bubbles have burst in a number of fields, which aggravated some households' financial situations. A weaker yuan has added to the pressure. Consumption downgrading has become the explanation for negative sentiment.
The so-called consumption downgrade serves to remind us to focus on consumption. Consumer behavior often shapes expectations. If people feel their debts will grow faster than their incomes, they'll spend less. That in turn affects the economy and manufacturing. Even though a consumption downgrade is not really happening, policymakers should keep track of consumer sentiment, offer guidance and launch stimulus measures as needed.
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