China is beset by severe economic problems caused by debt, disease, and drought.With China’s 20th Party Congress just around the corner, the Chinese Communist Party is more firmly enforcing its stringent zero-COVID policy and promoting equality. This has greatly impacted the nation’s consumer market and caused the stocks of many retailers and automakers to fall.  

As reported by Bloomberg on September 10, the MSCI China Index saw consumer stocks underperform this quarter due to uncertain future growth and record high youth unemployment. This contrasts with a double-digit increase in the global consumer index.

According to the report, consumer discretionary stocks plunged more than 14% this quarter, lagging behind the benchmark’s 12.6% drop.

Among the worst performers, Pop Mart International Group Ltd, a high-end toy retailer, tumbled more than 50%. Meanwhile, luxury car dealer Zhongsheng Group Holdings, dipped more than 30%.

The outlet noted that retail sales dropped through July from a year ago, reversing growth rates of about 8% or more before the COVID-19 pandemic started in early 2020.

Crystal Chan, head of investment specialist of Principal Asset Management (Asia), said, “People are beginning to cut down on spending again — COVID is one thing, another thing is, overall, the economic backdrop itself is deteriorating,” 

She added, “This is a big threat to the Chinese economy and that is why we are avoiding some of the consumer discretionary names in our Asian portfolio.”

Bloomberg reported that the communist regime has already put major cities under lockdown and also tightened movement restrictions ahead of the country’s national holiday. Investors have little expectations for Chinese consumption recovery in the short term.

Since late August, data from CNN shows that more than 313 million people in at least 74 cities across China have been sent into lockdown.

Among them, major centers of manufacturing and transportation in eight mega cities, home to 127 million people, have gone into full or partial lockdown in the past two weeks.

In addition, CNN, citing a Goldman Sachs’ estimate, reported that all cities affected by this lockdown accounted for 35% of China’s GDP.

Craig Singleton, senior China fellow at the Foundation for Defense of Democracies, said, “Beijing appears willing to absorb the economic and social costs that stem from its zero-COVID policy because the alternative — widespread infections along with corresponding hospitalizations and deaths — represents an even greater threat to the government’s legitimacy.”

Another factor that affected China’s consumer market is equality-promoting policies, which reject excessive wealth. Since this month, Chinese authorities have called on everyone to “avoid excessive consumption” and “glorify thriftiness.”

Paul Pong, managing director at Pegasus Fund Managers Ltd., said that Chinese consumers are happy to buy cheaper brands as they do not network in person anymore. Thus, they tend to cut more spending on luxury watches, expensive handbags, and clothes.

As a result, Chinese firms have to sell goods at lower prices amid a so-called “consumption downgrade” trend. Among U.S.-listed Chinese stocks, shares of Pinduoduo Inc. spiked about 40% last month, indicating the highest gain.

Raymond Yeung,  chief economist for Greater China at ANZ Research, said, “Put simply, China cannot count on a consumption-driven recovery. In the longer term, ‘common prosperity,’ ‘profit sharing,’ and remuneration cap will hurt high end spending. The luxurious segment will be hit.” 

Yeung believes that China’s economy will continue to decline in the next few months. Moreover, Chinese authorities will be “more inclined to prioritizing zero-COVID and snuffing out the virus outbreaks” amid the upcoming Party congress. 

Recently, top Chinese leaders signaled that they would likely miss the government’s annual growth target of around 5.5% this year.

Overseas brokerage firms also had to adjust their previous growth forecasts for the CCP this year.

Last week, Nomura continued to cut its already below-consensus forecast from 2.8% to 2.7%. Meanwhile, Goldman Sachs lowered its previous prediction from 3.3% to 3.0% in August.In late July, the IMF downgraded its forecast from 4.4% in April to 3.3%, citing COVID strict lockdowns and the real estate crisis in the country.

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