China’s economic woes hang over trade talks with U.S.

Open this photo in gallery:

U.S. President Donald Trump touted his country’s position in trade talks with China on Sunday as negotiations between the two are set to resume this week amid mounting signs of weakness in the Chinese economy.

U.S. officials will meet with counterparts in Beijing this week for the first face-to-face talks since Mr. Trump and China’s President Xi Jinping in December agreed to a 90-day truce in a trade war that has roiled international markets.

“I think China wants to get it resolved. Their economy’s not doing well,” Mr. Trump said at the White House. “I think that gives them a great incentive to negotiate.”

China’s economic woes came into sharper focus last week, after Apple Inc. cut its earnings forecast by at least US$5-billion, and pinned the blame squarely on the Chinese consumer. “Most of our revenue shortfall to our guidance,” the company said, “occurred in Greater China."

The Apple news reflected a series of factors, not least that the company has continued to raise prices on its devices at a time when trade frictions with the United States have made it both fashionable and patriotic to buy Chinese-brand devices − which are often cheaper as well.

But it has also highlighted a shift under way in China, where official economic numbers − which have been falling but remain relatively strong compared with those of global peers − have masked a rising sense of unease among consumers, one that extends beyond passing over iPhones. Faith in the country’s economic miracle is faltering.

The change is visible in the country’s car sales, which fell 14 per cent in November; in retail sales growth, which slowed to its slowest pace in 15 years that month; and most starkly in consumption-tax revenue, which dropped an astonishing 71 per cent in November.

And it’s become visible among young Chinese, who have made a hashtag of “consumption downgrading” as they trade new tales of woe.

It’s “a behavioural mode that people fall into when they lose faith in their incomes and their futures,” said Chen Liping, a scholar at Capital University of Economics and Business. “This is a kind of defensive action: We close our wallets to get through a special time.”

What’s happening is no mere marginal course correction, says Zhu Guanying, 28, a business consultant in Wuhan.

“It should be seen as a major social phenomenon, a trend,” she said, as people grapple with a perception that wages are no longer keeping pace with living prices.

“We are downgrading in all aspects of our life,” she said, citing a litany of changes she has made: no more Japanese skincare products or Western sneakers. No more eating out, either.

“I used to buy what I liked, but now I spend a lot of time thinking, and usually give up on the idea of new stuff,” she said.

Twenty-nine-year-old Gu Hong, who works at a startup in Beijing, is agonizing over purchase decisions that were once impulse buys. He sees the same hesitancy in those around him, as friends delay wardrobe upgrades and mobile-phone purchases.

Worse is the anxiety.

“How to raise my income has become a question that I spend hours thinking about every day,” he said. ”If you are not super rich, this kind of new normal is what you need to adjust yourself to in China today.”

It’s a worry that may seem at odds with some recent economic data published by Chinese statisticians. Although growth has been slowing, figures for the first 11 months of 2018 still show Chinese industrial profits up nearly 12 per cent, retail sales up 9.1 per cent and fixed-asset investments up 5.9 per cent. November unemployment edged down and inflation eased relative to the previous year.

The official GDP increase for the first three quarters continued to stand at 6.5 per cent. That’s high enough to be the envy of most other economies, but is the slowest growth posted in China since the financial crisis.

And some argue that the number is actually much lower. Xiang Songzuo, a prominent economist, delivered a public address in mid-December in which he cited an internal report from “a research team at a very important organ” that offered two estimates of the real 2018 Chinese growth rate: one at 1.667 per cent. “The second estimate is negative growth,” said Prof. Xiang, a scholar at Renmin University.

Such a dark view matches more closely with the mood in a country where “people are becoming more cautious,” said Gan Jie, director of the Center on Finance and Economic Growth at the Cheung Kong Graduate School of Business.

For years, China’s economic growth has been built in part on unsustainable footings − easy debt, a frothy real estate sector.

“That means there is vulnerability in the Chinese economy,” Prof. Gan said. “So when the winds shift, people will start to think a lot of the expectations were perhaps shaky and unfounded.” And, she added, the trade war has “exposed a lot of the structural problems in the Chinese economy.”

Still, others question whether Apple is a legitimate window into Chinese economic performance. “What’s happening in Greater China is not consumption downgrading, it’s the awakening of national consciousness. People are all using Huawei right now,” Wu Zhihong, a renowned writer and psychologist, wrote on social media. He called Apple chief executive Tim Cook “too naive.”

And if even if it’s true that consumers have grown cautious, that’s not all bad, some argue. Xue Haibo, an economics scholar at East China University, prefers the term “consumption deceleration” to “downgrading,” saying people are “decreasing the money they spend and removing unnecessary expenditures to seek more functional lives and the fulfilment of more important needs.”

“Maybe consumers are just becoming more rational,” he said.

Indeed, “we can’t say people are in a miserable economic situation, just like we can’t conclude that a person is living a miserable life because he eats instant noodles,” Prof. Chen said.

“Instead of craving meat, people start consuming more fruit and vegetables. They don’t buy luxury outfits, they buy good sneakers. Isn’t that a kind of improvement?”

On Friday, Beijing cut bank reserve requirements amid slowing growth at home and pressure from the U.S. tariffs.

Asked what he expected to come out of this week’s talks in Beijing, Mr. Trump sounded a positive note.

“The China talks are going very well,” he said. “I really believe they want to make a deal.”

With reports from Alexandra Li and Reuters