BEIJING — Consumer confidence will be minimally impacted by the surprise interest rate cuts unveiled last week by China’s central bank as part of an attempt to stymie an economic slowdown, according to analysts, who say the lower rates are aimed more at local governments and corporations than individual households.
This story first appeared in the November 25, 2014 issue of WWD. Subscribe Today.
Late Friday, the People’s Bank of China cut interest rates, reducing the 12-month benchmark-lending rate by 0.4 percentage points to 5.6 percent and the 12-month benchmark deposit rate by 0.25 percentage points to 2.75 percent. It was the central bank’s first rate cut since 2012.
Chinese leadership has shied away from infusing stimulus money as well as cheap credit into the world’s second-largest economy to keep it growing. Instead, Beijing has been focusing on structural reforms to try to create more sustainable economic growth not dependent on exports and infrastructure development, which has led to a glut of housing and other wasteful projects across the country. Economists say the rate adjustments are a sign that economic policy makers are worried growth may slow too much, resulting in job losses and a contraction in domestic consumption, which could lead to widespread social unrest and political instability. For the third quarter, China’s gross domestic product increased 7.3 percent, the lowest pace of expansion since the financial crisis in 2009. Beijing has set a growth rate of 7.5 percent for 2014.
“I see the rate cut as being more intended to keep the economy from getting worse than trying to make the economy pick up,” said Bill Adams, a senior international economist with PNC.
While the rate cuts might instill more confidence in Chinese consumers, the country is fundamentally different from Western markets, namely the United States, where interest-rate cuts can lead to increased household consumption due to credit-based spending versus, in China, where consumers still predominantly make purchases with cash.
“Chinese consumers have more personal credit today than they did 10 years ago, but this is still not a high-debt consumer economy — at least not yet,” Adams said. “So an interest-rate cut is still not going to have that large of an impact on consumer spending power. The biggest impact would be for corporate borrowers and Chinese local governments that have taken on a lot of debt to fund infrastructure investment projects in the last few years and now have to roll that debt over.”
Shaun Rein, managing director of China Market Research Group, a Shanghai-based consultancy that conducts consumer research for brands looking to enter the Mainland market, echoed a similar sentiment. According to Rein, consumer confidence, in particular among the middle class, is low.
“People are very concerned about the economy,” Rein said. “Consumer confidence at the middle-class level is the worst in 20 years. They are worried they won’t be able to pay for housing. Bonuses are not going up. It is a frustrating time for the Chinese. Obviously, the government understands there is a weakness in the economy, but it won’t have much impact on consumers in the short term.”
Rein said the rate cuts will likely have minimal impact on spending during key holidays, including Christmas and Chinese New Year, which marks the biggest spending spree for consumers here.
“Long-term, China is a great market,” he said. “Consumers are still confident enough to spend for key holidays. Certain categories might slow down, but you will still see spending for experiences, like traveling abroad.”
“At the end of the day, most people [in China] don’t look for rate cuts and the potential implications of that,” said Torsten Stocker, greater China retail partner at A.T. Kearney in Hong Kong. “It is hard to say whether this will impact consumer confidence. Most of the time what people look at is how stable their jobs are, or if they hear friends are losing jobs, that is when consumers get concerned and hold back on major spending decisions.”
Stocker said retailers complaining of slumping sales in China is a by-product of slowing economic growth, which can uncover weaknesses in business operations. “When you dig a little deeper, it is not the economy, but rather retailers’ positioning in the market,” he said. “It is hard to draw a link between an event like this and what might be happening to a particular retailer in the market.
“I still think China is attractive compared to most other economies in the world,” Stocker said. “But you have to work much harder to make sure you continue to grow.”
Godwin Lam, managing director for Trinity Ltd.’s China business — which manages retail operations for a number of brands here, including Cerruti 1881, Kent & Curwen and Gieves & Hawkes — said in the short term, luxury labels are more concerned with the impact of Beijing’s anticorruption campaign; and in the long term, they’re concerned with the impact of e-commerce rather than the state of the Chinese economy.
The rate cuts “will maybe impact more local, more mass brands, but not the high-end brands,” Lam said. “For consumers who shop with us, the interest-rate changes are negligible.”
Lam said retailers are confident China’s economy will make a comeback, but the degree to which consumers are finding discounted goods online is perhaps irreversible. “E-commerce is going deeper and deeper and deeper into the market,” he said. “Retailers are more worried about e-commerce than the economy and the degree to which consumers are no longer visiting brick-and-mortar stores to make purchases but are now only looking for discounted goods online.”
Alice Zhao, who lives on the outskirts of Shanghai, is a typical middle-class Chinese consumer. Her family owns a car and an additional apartment, which they bought as an investment. Zhao said nearly all of her friends are worried about the economy here, and her biggest concern is that she will not be able to sell off her extra apartment, which is already losing money. Housing prices across China have been steadily decreasing in recent months.
For Zhao, and others in a similar income bracket, which is around $60,000 annually, the trend is to put money into China’s stock market or other financial products rather than to put it into banks or spend it on consumer goods.
If she wants to buy products, Zhao said she goes overseas, specifically Japan or Hong Kong, where clothing is cheaper. She said she does not want to buy domestically made products because of quality issues or foreign-made goods because of inflated price tags.
“Right now, I don’t want to spend a lot of money,” she said. “I want to invest more. Buy insurance. Invest for my children and their education. I don’t want to consume. I want to invest.”