Fear of deflation as Chinese hold back on gadgets, getaways

Customers at an Apple store in the China Central Mall in Beijing, China
Photographer | Collection | Getty Images
Customers at an Apple store in the China Central Mall in Beijing, China

Lennon Yu may be Beijing's worst nightmare: the 24-year-old is willing to wait for car prices to fall before buying. This mindset, if it becomes widespread, could threaten to trap China's cooling economy in a deflationary rut.

With the world's second largest economy growing at its slowest in nearly quarter of a century, risks of deflation in China are growing just as a slump in global oil prices raises similar concerns in Europe and other parts of the world.

Consumer inflation eased in 2014 to a near 5-year low and policymakers are worried it could fall further because factory gate prices have been dropping for almost three years.

Chinese consumers are also curbing spending on nice-to-have items, a Reuters analysis shows, and there are signs more people are choosing cheaper products. Paired with sales engineer Yu's waiting game, these trends could push retailers to cut prices.

China's GDP growth slows
China's GDP growth slows   

"The consumer sector has passed its golden growth stage," said Jessie Guo, consumer equity analyst at broker Jefferies. "A meaningful recovery in retail sales seems unlikely, given volatile consumer sentiment, low CPI and a lackluster economy."

The Reuters analysis looked at just under 50 firms which make up the CSI300 Consumer Discretionary index .CSI300CD, a mix of Shanghai- and Shenzhen-listed firms that includes textiles, consumer electronics, media, tourism and autos.

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The data showed sales growth of items ranging from holidays to TVs to leather jackets shrank to around 7 percent at the end of last year from nearly 30 percent at the start of 2013. Consumer electronics, autos and tourism firms were hardest hit.

"We think there will be some sort of growth in 2015, but the rate will slow," said an official at carmaker Chongqing Changan Automobile, citing weaker macro-economic growth and policy changes in the sector.

Trading down

Weaker consumer spending and widespread thriftiness are clouds over Beijing's long-term goal to encourage domestic sales, rather than exports or investment, to drive economic growth.

If deflation sets in, changing consumer behavior becomes even more of a worry: for the past two years, Japan's Prime Minister Shinzo Abe has struggled to pull the economy out of a 20-year rut partly by encouraging consumers to pay more for services and goods.

"I haven't bought a car yet because I expect prices to fall," said the Shanghai-based engineer Yu. "I expect within three years prices will have fallen steeply, so I'll wait until then to buy."

While there is no clear indication that more Chinese than before are buying cheaper goods, lower priced items appear to have become more attractive.

China's imports of low-end wines from Australia rose last year, bucking the rising demand for premium and ultra-premium vintages across the rest of Asia, according to data from the Australian Grape and Wine Authority. Demand for lower grade robusta coffee beans is also rising.

Chinese domestic spending on luxury goods fell for the first time last year, as consumers turned to 'value' products made by smaller, less-established brands, according to a report this week by Bain & Co. Luxury sales have been cooling in part due to Beijing's crackdown on extravagance and graft.

A weaker economy will keep the pressure on Beijing to take aggressive steps to avoid a sharper downturn. But for some consumers, slower growth and falling prices mean more spending.

"The wider economy's in a slump, but for my cash flow it's helping, because things are cheaper," said 27-year-old policeman Zhu Zhen. "My salary is fixed, so my purchasing power is actually getting stronger."