China has made consumer stimulus its top economic objective. We believe the country's consumer-facing firms are entering a transitional phase, which will involve rapid gains for some and steep setbacks for others. Credit metrics will be unusually dynamic.

Much has been signaled. This is what we concretely know. In early March, officials made boosting consumption the chief economic goal for the year. It was the first time in a decade that consumer stimulus was given top priority at an important gathering of officials and lawmakers known as Two Sessions.

The government backed up this stance with a number of measures. Beijing said it would double its consumer appliance subsidy program to renminbi (RMB) 300 billion this year, and expanded the number of eligible items.

Why It Matters

A RMB300 billion subsidy scheme is not significant to an economy that annually turns over RMB140 trillion (China's 2024 GDP). It is also one-off consumption that generally just brings forward spending that would have happened anyway.

More meaningful to China's consumer sector are initiatives to boost wages and entitlements. This includes an increase this year in the wages of civil servants and pensions. These measures are structural and are designed to make people feel more comfortable about spending, we assume.

The government will also raise government subsidies for basic health services, the basic health insurance scheme and the basic pension scheme. We assume similar measures are in the pipeline.

A stronger consumer economy would likely make China less dependent on exports. This is fraught terrain given countries' complaints that China is exporting its excess supply, undercutting industries in target markets. Sharply increased U.S. tariffs will also make strong domestic demand more of a priority for China.

Table 1

Credit Implications For Consumer-Facing Firms: Goods Versus Services

Services

Chinese consumers are seeking a higher quality of life. Younger people in particular are deemphasizing work to focus on interests and personal fulfilment, in our view.

We believe this change in focus, along with the government stimulus measures, will benefit service-focused firms.

Goods producers will continue to grapple with soft demand. Consumers have been cautious about spending despite government subsidies and discounting from merchants and retailers.

Consumer confidence has stabilized in recent months. However, diminished household wealth (stemming from volatility in stock markets and for home prices) and a lukewarm economic outlook (hitting jobs and wages) can sap willingness to spend. Corporates may incur higher input costs under increased tariffs. This could hurt most of the companies we rate in this segment, which are mostly goods producers.

Recent data from China's National Bureau of Statistics shows spending on services is growing faster than spending on consumer goods (see chart 1).

Chart 1

There is significant room for growth in consumer services in China. Services comprised about 46% of all consumer spending in 2024, far below the 60%-70% ratio seen in the U.S., Japan and Europe.

The government has outlined consumer service sectors it wants to promote, without giving specifics on how. Growth in services would have more payoff in terms of creating jobs. Additionally, improved job numbers would lift consumer sentiment and spending.

Changes to China's service economy will largely play out into two broad categories: travel and sports, and on-demand delivery (such as food courier services, the fast delivery of packages and ad hoc services).

Travel and sports 

Outdoor activities, sports and fitness were among the top two most popular activities for China consumers as of late 2024, according to a survey done by Statista. The trend will likely continue, creating demand for sports facilities and services and related goods.

Tastes have been changing among Chinese tourists for several years. The market is moving from group tours to popular destinations, to customized trips that may target less-known cities. Travelers are increasingly seeking authentic cultural experiences in diverse locales.

Some firms will find it easier to capitalize on these trends by scaling up. Web firms that offer platforms for bookings or claiming vouchers are an example. Other entities, such as tour operators, may find it harder to scale.

On-demand delivery and services 

The segment remains a small part of retail. However, the potential is huge as consumer habits shift, with people increasingly looking for convenience and speed. Corporates are eyeing opportunities in this fast-moving segment. New entrants will sacrifice margins to build scale and gain consumer recognition and goodwill.

A recent push by JD.com Inc. into food delivery, along with plans to fully integrate the Chinese on-demand delivery platform firm Dada Nexus Ltd., is just one indication that competition is heating up in this segment.

Chart 2

Goods

While it will be a slower, lower-growth environment for product makers, there are mitigating factors.

Domestic brands have been gaining consumer loyalty. Chinese brands within the smartphone and electric vehicle (EV) sectors, among others, have recently proven to be at least comparable in quality with international firms, and are often much cheaper. This is helping to win consumers domestically and abroad.

Moreover, local brands can be much faster in adapting to changing consumer preferences in China compared with foreign brands.

China's import tariffs on the U.S., Canada and other regions may likewise turn consumers toward cheaper domestic brands.

Innovation-driven demand 

Signs of Chinese innovation are everywhere, including in consumer products. Xiaomi Corp. has crossed over from producing smartphones to making a popular EV model. U.S. tech restrictions on Huawei Technologies Co. Ltd. once looked crippling, yet the firm appears to be thriving, largely due to its innovations.

On the flip side, entities that do not constantly roll out new products may fall behind.

An example may be seen with China's dairy firms such as Inner Mongolia Yili Industrial Group Co. Ltd. and China Mengniu Dairy Co. Ltd. The entities are dealing with weaker sales for yogurt drinks. We estimate sales in this category was broadly down by a high single digit in 2024.

Consumers are increasingly opting for freshly made tea drinks. Vendors are making innovations such as adding matcha, durian and cheese, among many other unusual ingredients, to their beverages. This is pulling consumers from yoghurt drinks.

Companies with limited innovation might need to spend more on promotion to maintain market share. Their margins may even fall in the years ahead. This group of companies may just focus on maintaining a conservative financial policy to carry them through a period of low growth.

Home appliances & electronics 

Consumer products will likely get a boost for at least the next eight months from government stimulus, particularly the trade-in program and consumption vouchers. However, shoppers may slowly come to expect these subsidies, and may be reluctant to buy goods without them. This may particularly be the case for large appliances.

Moreover, we view the gains as temporary, and likely to cannibalize demand in later years. Given that household appliances typically last about a decade, the recent subsidy-spurred purchases could hit purchases of such items for years.

Electronics have a much shorter replacement cycle--about three years for mobile phones and laptops. Unit prices are much lower than appliances, and the devices are used more frequently. Subsidy-driven sales should be more supportive of sales, even accounting for lost demand for the next two to three years.

Dawn Of A New Consumer Era?

Beijing has aimed at raising the role of consumption before, as part of efforts to rebalance growth starting in the late 2000s.

We think the current push may be more durable, and made more of a priority by the anti-globalization trends unfolding in the world. The tariff situation is one X-factor, given possible hits to the Chinese economy and employment.

Broadly, however, the picture remains the same. Chinese incomes continue to grow even as the country's GDP gains decelerate. China's core consumer story remains intact: that of increased incomes, a rising middle class and broadening tastes.

Chart 3

Writer: Jasper Moiseiwitsch

Related Research

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