China faces significant economic challenges, and many prevailing views and data points appear contradictory. Official data indicated that China’s consumer market had broadly returned to its pre-pandemic 2019 level by 2023. Consumption was growing compared with the three pandemic years. CPI data, however, pointed to weakening household consumption and subdued willingness to spend.
It is also important to note the substantial expansion of money supply in 2023, with new debt reaching US$685.6 billion. Despite this, the economy showed signs of deflation rather than inflation. The main reason, in our view, is China’s heavy debt burden: total debt exceeded RMB 650 trillion, while GDP for the whole of 2022 was only RMB 121 trillion—meaning debt was more than five times annual GDP.
China’s debt can be divided into four categories:
- Financial institutions account for less than 1%;
- Household debt accounts for nearly 10%;
- Government debt accounts for more than 27%;
- Corporate debt is the largest category, representing over 60%.
China’s economic growth has long been driven by three engines: investment, consumption and exports.
On exports, the structure has changed markedly over the past two years—in simple terms, shifting from labor-intensive to capital-intensive production. This has contributed to a sharp rise in unemployment.
Investment mainly comes from overseas capital, government spending, and domestic companies and individuals. Overseas and private domestic investment are currently contracting because expectations of returns are low. Government investment remains focused on major infrastructure, but it too faces diminishing marginal returns.
On consumption, the economic slowdown and wealth distribution have made households more pessimistic about the outlook, weakening their willingness to spend.
Overall, Chinese companies and individuals are likely to remain in a deleveraging phase for some time. Combined with high unemployment and pessimism, this means consumption is unlikely to improve materially. The pressure will be especially acute for discretionary goods and property-related categories such as apparel, beauty, furniture and home appliances. Some sectors, however, will find new opportunities—particularly culture and entertainment and government-supported areas such as travel and outdoor activities, film, and new-energy vehicles.
Each subcategory will differ. Within beauty, for example, color cosmetics may be more affected, while demand for facial masks remains strong, although consumers may change the types of products they choose.
For brands, more of China’s consumer traffic is likely to be directed toward domestic brands, helping Chinese companies navigate the downturn, resolve debt and stabilize employment. The operating environment for international brands will become more difficult. They will need to strengthen brand awareness and allocate a greater share of resources to brand building, while reducing the proportion spent on labor and logistics, to weather the downturn.