China’s Economic Recovery Hinges on Consumers. They’re not Spending.

A woman wearing a protective mask walks on a shopping street ahead of Alibaba’s Singles’ Day shopping festival, following the coronavirus disease (COVID-19) outbreak in Shanghai, China, October 20, 2022.

In Shanghai, the famed shopping streets have yet to return to their pre-pandemic hum. Though the harsh coronavirus restrictions that gripped the country finally ended in December, small businesses in the commercial heart of China are still struggling to find a pulse.

“It really still isn’t okay,” said Liu Jun, who has run a flower shop near Shanghai’s famed Jing’an Temple for the last six years – half of which were plagued by unpredictable lockdowns under President Xi Jinping’s strict “zero-covid” policy.

Multiple owners of shops nestled between the glittering high-rises, elevated highways and leafy sidewalks surrounding the temple had anticipated a surge in “revenge spending” after the zero-covid policy was suddenly dropped in December in part because of Beijing’s concern over the mounting economic toll.

After three years of rolling lockdowns, including a particularly tough one in Shanghai last spring, China is confronting its worst economic indicators in decades. The country’s GDP last year grew just 3 percent, a stark departure from growth of over 8 percent in 2021 – and its lowest level since 1976, the year that Mao Zedong’s disastrous Cultural Revolution ended.

Experts inside and outside of China say that its $6 trillion consumer market will be central to getting the world’s second-biggest economy back on track, not least because global demand for China’s products remains sluggish.

But the pent-up wave of consumer spending that experts predicted would follow the policy’s end has yet to take shape.

The streets in the Jing’an district – which translates to “peace and tranquility” – remain a little too quiet for shop owners like Liu. “We haven’t had a good year for a while,” he said.

Shanghai – the commercial and financial capital of China, and its most populous city, with 25 million residents – had it particularly hard, with a two-month lockdown that only started to ease in June.

Despite its official end, the zero-covid policy has taken a lingering toll on consumer demand.

“With the complete overnight abandonment of zero covid, you’d think people would rush to restaurants and movie theaters,” said Victor Shih, associate professor of political economy at the University of California at San Diego.

But the expected flood of pent-up spending hasn’t yet happened. Retail sales fell 2.6 percent in December compared with the previous year. Statistics for January have not yet been released, but the traditional Lunar New Year spending spree was muted.

Companies such as Yum China, which operates KFC and Pizza Hut in China, have signaled caution as consumers remain careful, while luxury brands Estee Lauder and Gucci have reported slumps in demand in China.

There are some glimmers of hope. In January, box office revenue rebounded to top pre-pandemic levels, surpassing $1.46 billion for the month, according to the China Film Administration.

During the previous three years, people in China were required to stay home for weeks at a time over even the distant possibility of exposure. When a trip to the mall or to work might end in a weeks-long quarantine, there was little incentive to spend.

Outbreaks disrupted work for people at all income levels. Businesses were forced to close for weeks while staff and customers were shut at home. Outbreaks at factories and ports rippled into months-long delays across the supply chains for everything from shoes to cars.

But those whose businesses depended on walk-in customers – corner stores, sidewalk snack sellers – were especially hard-hit, and some shuttered business permanently.

Liu’s neighbor, Li, has run a beef noodle shop near Jing’an for 20 years, and so far this year his business is even worse than last. “It’s bad because of covid,” said Li, who declined to share his given name. “People still are not coming out much.”

People remain nervous, and latest surveys of managers at hundreds of private Chinese companies indicate little optimism. Government crackdowns on some of the country’s highest-flying tech companies have spooked investors.

The economic slowdown could have big political implications.

China’s Communist Party has remained in power partly by delivering economic growth at the expense of political change. But this trade-off, tacitly accepted by the growing middle class through years of double-digit growth, has been strained by the financial hardship that zero covid imposed on ordinary households.

The harsh coronavirus response demonstrates the risks that Xi’s increasingly unilateral approach could pose to the country’s economic growth, said Neil Thomas, senior China analyst at Eurasia Group. And that could threaten Xi’s hold on power in the long term.

“If China’s economy stagnates at a low level of growth and noticeably underperforms its potential – especially in terms of not catching up with the United States and becoming the world’s largest economy – that could conceivably cause some leaders in the party to begin to question the wisdom of Xi’s policy approach and put pressure on him to pursue different policies,” Thomas said.

The International Monetary Fund has predicted that China’s economy will grow 5.2 percent this year, and economists and investors alike are optimistic that despite the slow start, the country will achieve something close to this target.

Reviving confidence will be key to reaching that goal.

“Consumption plays a fundamental role in China’s economic development and is the main driving force boosting economic growth,” Wang Yun, a researcher at the Academy of Macroeconomic Research in Beijing, which is affiliated with China’s economic regulator, told state media. She said China’s growth rate could top 6 percent on the back of increasing consumer spending this year.

But it’s difficult for people to feel confident spending while the property market teeters on the edge of a crisis.

A quarter of China’s economic output depends on the construction sector, including the construction of new homes. After multiple developers defaulted on unsustainable levels of debt over the past two years, thousands of home buyers were left with unfinished apartments. New apartment sales are still down.

But after potential home buyers have had to survive three years of unpredictable disruptions to work, the ongoing instability in the property market has done little to convince them to part with their savings.

“I suspect that middle income and poorer households have had to essentially wipe out their savings during the covid lockdowns,” Shih said. “The spending power among middle income and low income people is probably a lot weaker today compared to 2020.”

Although even the State Council, China’s cabinet, has called for the nation to boost consumption, and small businesses have received some tax breaks, the government has stopped short of offering any kind of direct stimulus.

Local governments, typically an engine of economic growth, have not been able to boost their local economies either. They have struggled under the weight of debt they had already borrowed to finance infrastructure projects, while also administering a vast network of coronavirus testing sites and quarantine centers required to enforce the zero-covid policy.

As local governments try to balance their books, there have been widespread reports of salary cuts for China’s civil servants. “But civil servants in China are the middle class,” Shih said. “Their salaries getting cut means their ability to consume will be reduced.”

Outside the biggest cities like Shanghai, Beijing or Hangzhou, people rely on local investment, Shih said. “If the local governments can’t spend money, it’s really going to impact the spending on the people in those cities – the majority of cities in China.”

China’s middle class will need to spend on more than movie tickets and beef noodle soup for the economy to bounce back. They’ll need to be willing to shell out for big purchases like appliances, cars and new homes.

But after thousands of people were left with unfinished homes they’d already paid for when developers defaulted, confidence in the property market is low.

Liu Shouying, dean of economics at Renmin University, in December called for property and land reform to address the core problem.

“The covid-19 pandemic is not the root cause of the current economic problems,” Liu said at a speech in Beijing in December. Instead, it has compounded the challenges China was already facing as it tried to transition toward more high-tech development.

Policymakers need to restore confidence by quickly getting homes completed that people have already paid for, said Joe Mazur, Beijing-based financial analyst at consultancy Trivium China. China could come close to the IMF’s growth projection, said Mazur, and the expected surge in revenge spending could materialize – if the property market stabilizes.

“If they can get that right and revive that engine of growth, combined with the end of zero covid, 2023 could be a good year for the Chinese economy,” Mazur said.

While Liu and Li are struggling, some in Shanghai are optimistic. In a one-room flower shop in Shanghai’s Xuhui District on a recent Friday, a steady stream of customers trickled in. Last year, the shop had been forced to close for three months, said Wang, the owner. This year is a big improvement, he said. “We can survive at this rate.”