China’s gold rush shows consumers still have money to boost the economy

The consumption trend reflects risk hedging and a lack of confidence in a declining economy, which is struggling to regain momentum since the lifting of pandemic-related containment measures.

This also reflects that there is money in the system – but Chinese consumers just aren’t very keen to spend their hard-earned money at Starbucks or Gucci.

China’s economy faces multiple risks and uncertainties, including an epic real estate crisis, stock market volatility, geopolitical headwinds and demographic challenges.

“As China’s population faces rapid demographic aging, Chinese households are trying to increase their retirement savings at a time when housing and stock markets are weak,” said Rajiv Biswas, international economist and author of “Asian Megatrends.” , to Business Insider. .

Last year, Chinese demand for gold jewelry increased by 10% compared to 2022, reaching 630 tonnes acquired, making the country the world’s largest buyer of this raw material, according to the World Gold Council. Chinese demand for gold jewelry weakened in the first quarter of this year due to soaring gold prices, but it is still holding up well, according to the council.

China’s Gen Z consumers are ditching luxury for gold

Unlike the rush for gold assets, Chinese consumers are not short of buying even more products, including foreign imports.

That’s a problem, especially for luxury retailers, because Chinese demand for high-end goods has fueled meteoric growth in the sector for years.

This is no longer the case.

LVMH Moët Hennessy Louis Vuitton, the world’s largest luxury group, announced in April that its revenue in Asia excluding Japan fell 6% in the first quarter compared to the same period last year.

Kering, the luxury retailer that owns brands including Gucci and Yves Saint Laurent, has issued a profit warning due to the struggling Chinese market.

Reflecting the number of shoppers who have abandoned luxury purchases, Chinese shoppers were responsible for around 23% of luxury spending at the start of the year, compared to 33% before the pandemic, a figure that has been declining . The Bloomberg analyst said recently.

Chinese consumers buy cheaper domestic products

Even imports are taking a hit, with coffee chain Starbucks signaling that a slower-than-expected recovery in China will lead to weaker annual growth this year, the company reported in April.

Starbucks CEO Laxman Narasimhan said during a first-quarter earnings conference call that many customers are “more discerning about where and how they choose to spend their money.”

Nomura analysts noted in an April report that young Chinese consumers have become “much less enamored of high-end foreign products and now appear to prefer low-cost domestic substitutes.”

In the case of Starbucks, Luckin Coffee – China’s largest coffee chain – is aggressively offering attractively priced beverage deals to beat the American company.

Patriotism also plays a role in this trend. This is true even for some products that are priced around the same price as imported products, such as the recent increase in shipments of Huawei phones amid falling iPhone sales, and a similar trend among electric vehicles Tesla and BYD, Nomura analysts added.

Contributing to this trend is China’s painful economic transition, which is leading to a difficult economic outlook for its people.

“As income growth slows and unemployment risks rise, high premiums paid to foreign brands become increasingly difficult to justify,” Nomura analysts write.

China’s GDP per capita expected to rise further

Despite the gloom, there are green shoots in the Chinese economy.

April data from China showed that the country’s consumers are buying fewer things – like clothes, cosmetics and jewelry – but are spending on experiences.

Consumption in the eat, drink and play categories of food service, tobacco and alcoholic beverages, and sports and leisure has outpaced overall consumption growth. This signal shows that “consumers have forgone expensive purchases in favor of spending in these categories in 2024”, writes Lynn Songchief economist for the Greater China region of the Dutch bank ING.

This preference for experience spending also spills over into the consumer sector. Jean-Jacques Guiony, LVMH’s chief financial officer, said in April that more Chinese were spending money outside their country as they resumed travel.

Despite everything, Chinese consumers should maintain their appetite for gold.

The world’s second-largest economy’s GDP per capita is also expected to increase from $12,700 in 2023 to $18,000 by 2030, which is expected to boost demand for gold in the future, economist Biswas said.

The weakness of the Chinese yuan encourages consumers to buy gold with their savings to protect themselves against currency risks.

China’s savings rate was about 32% last year, compared with about 4% in the United States, according to a McKinsey analysis of official data.

“As consumer confidence continues to plummet, consumers prefer to put their money in the bank rather than spend it, pushing the savings rate higher,” McKinsey wrote in April.

The spot gold price is around $2,335 per ounce, a record high above $2,400 reached on May 21.

There could be more upside potential for the yellow metal.

“Chinese households are increasingly facing China’s weak long-term growth prospects and falling prices in China’s residential real estate market,” Biswas said.

The economist said these woes will continue to push investors, especially those looking to increase their retirement savings, towards gold.


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