One of the biggest false narratives pitched by the mainstream to mitigate concerns about a global recession, is that even as China's massively overlevered manufacturing sector is careening into a hard landing, China's "strong" consumer base will keep the country's economy afloat (a narrative shared with the U.S.), even though as reported over the past weekend retail sales soundly disappointed expectations, while the latest proxy of China's consumer strenth, namely "record" box office receipts, was recently uncovered to have been - like everything else in China - mostly fabricated.
There is one main problem with this: China's consumer is neither strong, nor resilient, and is in fact getting weaker, and more angry by the day as China's labor conditions continue to deteriorate: just yesterday we reported that "Enormous Crowds" Of Unemployed Chinese Miners Take To The Streets, Clash With Riot Police. Granted this is taking place in China's industrial region, where massive overcapacity has led many local companies to the verge of bankruptcy, however the weakness has clearly spilled across to all other parts of the country.
An overnight report confirms as much: according to Reuters, "retailers in China are shedding staff, slowing expansion plans and seeing stocks pile up in warehouses as shoppers tighten their belts - a major headache for a country that has pinned its hopes on consumers to drive economic growth."
Hardly supportive of the "strong Chinese consumer" narrative, Reuters adds that with that growth running at its slowest in a quarter of a century, China's consumption patterns are changing, with wealthy middle-class households trading down from up-market to more affordable brands, and poorer families paring back on even basic purchases.
China's top 50 retailers saw sales fall 6 percent at the start of the year, and sales of basic goods from noodles to detergent grew just 1.8 percent at the end of last year, down from over 9 percent just three years ago, according to Kantar Worldpanel data.
The weak sales of even cheap household goods underlines the challenge for China, desperate to get its 1.4 billion people to spend and give some fresh impetus to the economy.
Confirming that the Chinese consumer is anything by strong is Yang Shunjie, 28, a Shanghai-based client manager at a state-owned firm, who earns between 10,000-15,000 yuan ($1,500-$2,300) a month who said that "maybe before, if I wanted something I'd just go and buy it. Now I only buy things I really need." He said he also shops more online where prices are cheaper and will wait for end-of-season discounts to buy new clothes.
And while the media narrative is desperately holding on to the lie, for many international names who have targeted Chinese consumers in sectors from retail to luxury and even fast-food, where they banked on continued growth, the truth has become a huge problem.
Procter & Gamble whose China products include Pampers diapers and Tide laundry detergent, said in January its sales were "significantly down" compared with 2014. Infant formula maker Mead Johnson Nutrition Co said price competition and a shift to smaller shops and online hit sales.
A customer looks at toothpaste products at a supermarket in
Shanghai, China, March 10, 2016.
"We are seeing shifts within retail. High-end luxury goods have had a very good few years, but that's coming to an end. Tastes are changing," said Mark Williams, chief Asia economist at Capital Economics in London.
Earlier today we got a stark warning about demand in China's ultra luxury segment from none other than Patek Philippe Chairman Thierry Stern who said many watchmakers who relied too much on China aare cutting jobs, and added that "I strongly believe that we still have to wait a few years before mainland China is going to catch up." Stern says, citing anti-corruption campaign.
Third party measures confirm as much: Westpac's most recent consumer survey showed sentiment at its lowest since October. "The February update points to continued weak conditions and elevated job-loss fears again weighing on the consumer mood," said Senior Economist Matthew Hassan, adding that any loss of momentum for consumer demand could raise the risk that growth stays weaker for longer.
Nobody has been hit harder in China, however, than retailers: executives and consumer goods makers said China's slow growth is punishing the sector and forcing many to cut back, focus on smaller, faster-growing cities and offer more discounts.
"We are struggling to adapt as sales move online or to small mom-and-pop stores," said a senior sales executive at a major Western consumer goods firm. "At the moment, it's carnage."
What measures are retailers taking to deal with this "carnage"? Actully none, and just like in the U.S., they are merely stockpiling inventory in hopes that the current weakness will pass soon.
According to the sales executive quoted above, inventory levels at some clients had jumped to as much as nine months, from a normal average of around two weeks. For retailers and consumer goods brands alike, that means re-thinking their sales pitch. China-based advertising executives say some are adopting a two-tier marketing strategy: imported, premium ranges to target more affluent consumers, but also buying up popular and affordable local brands.
Just like with the U.S. oil market where inventory stockpiling is off the charts on hopes a price recovery is imminent, all this excess product will sooner or later hit the market, leading to liquidation dumping, massive price cuts, and another global wave deflation.
Meanwhile, going back to the truth behind China's "strong consumer" lie, we find that the weak consumer demand has triggered a spike in profit warnings from China-focused consumer firms. Some examples:
Food group Tingyi, grocery chain Lianhua Supermarket (0980.HK), China Outfitters and Man Sang Jewellery are among those blaming poor sales on "weakening consumption" and an expectation of lower prices. Aka deflation.
"This year hasn't been great, in fact up until now business has been slow," said Chen Lu, a sales assistant at household goods chain Enjoy Easy in Shanghai. Chen added shoppers who spent 100-200 yuan ($15-$30) per visit last year on products from clothes hangers to sponges were spending a lot less. "Now each person might spend just a few dollars."
Sun Art, China's second-biggest hypermarket operator, said last month that 2016 would be a "challenging year" for retailers. Its 2015 profits declined 16 percent.
Most troubling is that the mainland weakness has now spilled across the border to Hong Kong: retail sales there had their biggest fall in 13 years in 2015, and the slump has continued this year.
"Most of our members saw double digit falls in sales (in February)," Thomson Cheng, chairman of the Hong Kong Retail Management Association, said on a conference call this month, adding many retailers were cutting staff to stay afloat.
"We are all very worried about the situation."
Which, of course, is music to the market's ears: the more worries, the more certain monetary (and fiscal) stimulus becomes; stimulus which as 8 years of "developed market" case history has shown, does little to boost the economy but does miracles for risk assets.