In China's heartland, once-flush shoppers turn cautious
By Stella Qiu, Yawen Chen and Philip Wen ZHENGZHOU, China (Reuters) - Dressed in a smart black pantsuit behind the wheel of her pearl-white Audi, Zhao Na has come a long way from her roots in rural Henan province, in central China.
By Stella Qiu, Yawen Chen and Philip Wen
ZHENGZHOU, China (Reuters) - Dressed in a smart black pantsuit behind the wheel of her pearl-white Audi, Zhao Na has come a long way from her roots in rural Henan province, in central China.
The 29-year-old real estate agent cheerfully admits to having shopaholic ways and a love of Louis Vuitton and Prada handbags, typifying a wave of free-spending consumers who have had the world's top brands scrambling for a piece of China's $5 trillion-plus retail market.
"When I am flush, I am happy to part with money," said Zhao, who once splurged around 60,000 yuan ($9,000) on a clutch of handbags during a trip to Paris in 2017. "Spending makes me happy."
But with China's economy slowing, Zhao's business has hit a wall and her income has plummeted, forcing her to shelve that source of happiness.
She has scrapped the European shopping trips and weaned herself off buying binges at her favourite mall, David Plaza, where giant digital screens flash advertisements for brands like Gucci, Lancome and Ermenegildo Zegna in the centre of Zhengzhou, Henan's capital.
"Not being able to spend money as I like makes me feel lousy, but I cannot do much about it," Zhao said.
An economic slowdown in China, after three decades of unbridled growth, is being felt especially keenly by consumers like Zhao in Henan. The province, with its 100 million people, is a key pillar of China's aspirations to transform its economy by boosting domestic spending and raising living standards in the country's interior.
But according to dozens of interviews with consumers and merchants across Henan, as well as trade group data, people in the province are spending less on everything from cars and household appliances to clothing and cosmetics.
For a graphic map of Henan province, click: https://tmsnrt.rs/2WK6CVv
Scaled-back consumption by inland urbanites like Zhao could have serious repercussions for China's economic growth, already imperilled by an escalating trade war with the United States.
It could also be a reality check for global retailers.
The Italian suit-maker Ermenegildo Zegna, the American luxury jeweller Tiffany, and Apple have all warned that consumers across China are paring back spending.
On Wednesday, China reported weak growth in retail sales, and a drop in spending on clothing for the first time in a decade.
Slowing spending in inland cities such as Zhengzhou could dent the ambitions of global retailers that have pinned their hopes on future growth in regions like Henan, the largest provincial economy beyond China's prosperous coastal regions.
A PROVINCE TRANSFORMED
Long a dusty provincial capital, Zhengzhou's transformation in recent years into a metropolis with a glittering skyline and fashionable malls has been staggering.
The city of 10 million is a key transportation hub on China's Belt and Road network, linked by rail to Central Asia and Europe beyond, with high-speed connections to Beijing and Shanghai. The Taiwan contract manufacturer Foxconn has built an enormous iPhone factory in the city that employs 230,000 people.
Ambitious young people once typically fled Henan to seek better lives elsewhere. But Zhengzhou now gives them a place to pursue their middle-class dreams: earning more and being able to afford their own modern homes and an array of consumer goods.
For Zhao, the city was a beacon of hope.
Born into a family of farmers in rural Henan, the youngest of three children, Zhao dreamed from an early age of escaping her impoverished village. She did well in school, which allowed her to attend university in Zhengzhou, where she discovered a talent for sales.
She joined a property developer, working for rich clients sporting designer clothes and fancy handbags. Soon, she was able to taste that lifestyle herself as she began racking up lucrative commissions on sales of top-end apartments in Zhengdong New Area, a commercial district where luxury hotels and office towers have sprouted from farmland.
She became a regular at the high-end shops of David Plaza and bought a car and two homes, letting one of them out on Airbnb.
Supplementing the commissions, Zhao also piled up debt on her half-dozen credit cards. She says she owes about 200,000 yuan in credit card debt, on top of monthly mortgage and car payments totalling 15,000 yuan.
But as Zhengzhou's frenzied property market cooled last year, sales plummeted, along with her commissions. And that put an end to her shopping trips to David Plaza.
Zhao is not alone in cutting back. Consumer confidence in provincial cities such as Zhengzhou fell slightly last year after hitting its highest level in at least nine years in 2017, according to Nielsen, a research firm. Retail sales growth in Zhengzhou fell to single-digits last year for the first time in nearly two decades.
At two malls in Zhengzhou's downtown shopping district, retailers selling cosmetic brands like Kiehl's and Clinique said customers were becoming more careful.
"They used to buy a lot and spend their money rather carelessly," said Li Mengru, the cosmetic sales manager at the Dennis Department Store who oversees brands including Chanel, Dior and Estee Lauder. "Now they are becoming choosier as they turn cautious about spending."
A key driver of consumption in China in recent years has been the explosion of new finance options, including peer-to-peer loans and endless opportunities for acquiring credit cards. That put a wealth of consumer goods in reach for people previously unable to afford them.
Chai Maofeng, a 28-year-old beef distributor in Xuchang, a Henan city of about 4 million people, opened ten credit card accounts in 2016 to furnish his apartment with a sofa set, refrigerator, air conditioners and televisions – all brand new.
"Opening a credit card account was easy - banks were happy to lend to you, and all you needed was a landline number that suggested you worked in an office," said Chai.
But Chai said he had to put his freespending ways on hold after the economic slowdown started hurting his business, which had also been hit by a sweeping crackdown on polluting industries that pushed up beef prices.
Chai said he had put off plans to buy a second property and a new car.
"This one from the company is actually fine," he said, referring to the white van his company lets him use.
WORSE TO COME?
China's economy showed signs of recovery in the first quarter, with gross domestic product growing more than expected by analysts. But an intensifying trade war with the United States, sluggish factory activity and slowing global demand for Chinese products suggest the slowdown will continue through 2019, most economists say.
Efforts by Beijing to rein in credit and risky debt over the past few years to contain speculative bubbles has also reduced the amount of easy money available for many consumers.
Those factors are likely to keep weighing on consumer spending, analysts say.
Beijing has taken steps to prop up spending, announcing plans in January for subsidies to boost purchases of cars, an industry that saw sales decline last year for the first time in two decades. The government has also sought to increase take-home pay by reducing the income tax burden for many individuals.
For a graphic on Henan's skidding auto sales, click: https://tmsnrt.rs/2WD0Gxy
But government help is unlikely to offset a decline in confidence stemming from slowing income growth and rising household debt, analysts say.
For all that, consumers have not stopped spending altogether. On a recent afternoon in downtown Zhengzhou, David Plaza was bustling, with shoppers checking out the latest lipsticks and sipping lattes in coffee shops.
But Zhao was not among them.
Staring at almost 30 years of mortgage payments ahead of her, and the car loans she still needs to repay, she said it might be a while before she shops at the mall again.
"With income falling, I have to make every penny count," Zhao said. "Unnecessary luxury spending has to go for now."
(Reporting by Stella Qiu, Yawen Chen and Philip Wen; Editing by Tony Munroe and Philip McClellan)
This story has not been edited by Firstpost staff and is generated by auto-feed.
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