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The CEO of China’s e-commerce firm JD.com has raised concerns about the timely recovery of China consumer confidence, despite stimulus measures introduced by the country’s government and the resumption of production activities halted by the Covid-19 pandemic.
“Consumer spending is recovering in an imbalanced way, which means it will likely take until the second half of the year for the speed of recovery to improve,” said JD.com CEO Xu Lei during an earnings call on Friday. He added that it will take time for the government’s stimulus measures to be reflected in China consumer income and confidence.
What does the official data say?
China’s retail sales in 2022 declined by 0.2% year-on-year. Nonetheless, retail sales fell 1.8% year-on-year in December, less than the 8.6% drop forecast by a Reuters poll. Also, China consumer prices grew by a modest 1% in February compared to the previous year. Compared to this, China’s retail sales of goods increased by 6% in 2019, before the advent of the pandemic. Further, retail sales increased by 0.53% in December 2019, compared to a 0.80% gain in November of the same year.
“In the aftermath of the pandemic, consumers have become more pragmatic and rational in their purchasing decisions, based on reduced consumption needs as well as increased economic pressures and life uncertainties,” said Deloitte in a study.
“People have reduced impulse purchases, prioritising product quality and value, taking advantage of promotions, and comparing prices across multiple sellers before making a purchase. With much more information available, consumers are taking recommendations with a pinch of salt,” the study added. To put things in a better perspective, let’s look at the earnings figures of China’s top e-commerce firms for the final quarter when Beijing removed the zero-Covid measures.
How is China consumer confidence doing?
JD.com’s revenue for the fourth quarter of FY2022 increased 7.1% to 295.4 bn yuan (~$42.49 bn), falling short of the Refinitiv average expectation of 296.2 bn yuan (~$42.61 bn). The net income attributable to ordinary shareholders was 3 bn yuan (~$431 mn), compared to a net loss of 5.2 billion yuan (~$747 mn yuan) the previous year.
In comparison, JD.com’s market competitor Alibaba recorded a total revenue of 247.8 bn yuan (~$35.65 bn) in the fourth quarter of 2022, a 2% year-on-year increase. Alibaba’s net income attributable to ordinary shareholders was 46.8 bn yuan (~$6.9 bn), a 67% year-on-year increase.
An interesting observation here is that Alibaba’s revenue growth was 10% for the fourth quarter of 2021, whereas JD.com saw a revenue increase of 23 % during the same period. This indicates the removal of Covid policies had no immediate impact on China consumer confidence in the final quarter of 2022.
Online direct sales revenue of JD.com in the quarter grew by 1% year on year while Alibaba’s direct sales increased by 10% year on year.
The third major player in the e-commerce sector, Pinduoduo, is yet to release figures for Q3 of FY 22.
In the aftermath of the stiff competition, JD.com announced this week a 10 bn yuan ($1.44 bn) subsidy to help suppliers and vendors on its platform sell goods at a more competitive price. However, this has the investors worried as they think this will drive up the company’s marketing costs, reducing its profit margins. Since the Chinese media reported on the new subsidies, the company’s shares have started tumbling.
The e-commerce giant’s shares fell by 11.28% to $41.68 on March 9 in New York, and on March 10, its Hong Kong-listed stock fell more than 10%.
However, JD’s CEO believes that the programme has already shown “fruitful results” and exceeded expectations in terms of generating more users and traffic. He also stated that the business will measure the programme’s performance based on existing user behaviour and new user acquisition.
China consumer demand and low GDP growth
After missing its GDP growth target by a wide margin last year for the first time in history, China is expecting lower economic growth of around 5% for 2023, with the country’s senior policymakers avoiding any major stimulus measures to spur an already underway consumer-driven resurgence.
Analysts were expecting a hawkish stance following the removal of Covid-19 restrictions on the back of the recovery in consumer spending and industrial output.
Premier Li Keqiang’s government work report, presented on March 5, highlighted the mounting uncertainties. “There are still a number of problems impeding the recovery and expansion of China consumption,” according to the report. “Resuming growth in real estate investing is a difficult task.”
Despite these problems, the Chinese government has instead decided to allocate 170 bn yuan ($24.6 bn) in Covid-19 management this year to aid the recovery after removing practically all pandemic restrictions.
According to the draft budget presented to China’s top legislature, the funds would be used to subsidise local governments, particularly those at the county level, for the prevention and control of Covid-19. According to China’s finance ministry report to the National People’s Congress (NPC) on Sunday, the total amount would include 30 bn yuan (~$4.31 bn) in unutilized budget allocation from the previous year.
