China’s heavily indebted real estate industry has been in a prolonged slowdown since late 2021, with house prices falling more rapidly in recent months. Despite the relaxation of strict Covid-19 controls in late 2022, the weak property market has sapped confidence, as well as demand for consumer goods.

In the wake of the pandemic, many businesses exposed to China – local and overseas – expected consumer-focused stimulus to boost growth. While that has not happened, economists believe Beijing might take such measures if Donald Trump is re-elected.

Fitch Ratings analysts pointed to data showing that in the first half of the year, growth in China’s catering sector slowed to below 8% for the first time since 2010, excluding the Covid period.

“Uncertainty surrounding disposable income prospects, combined with further shrinkage of household wealth due to falling housing prices, has led to a reduction in non-essential expenditure or a shift towards value-for-money product,” the Fitch analysts said, adding that the trend extended beyond dining to “key discretionary categories” including clothing, cosmetics and jewellery.

“The only part of the world where consumer confidence remains very low is China,” said L’Oréal chief executive Nicolas Hieronimus. “The job market is not healthy and many of the Chinese have put their savings into real estate, which has lost a lot of its value.”

And while China remains a growth market for many multinational companies, in some sectors such as cars, they face a big threat from domestic rivals.

Amid a rapid shift towards electric vehicles, overseas brands accounted for 38% of passenger vehicle sales in China in the first half of this year, down from 64% in 2020, according to Shanghai consultancy Automobility.

German carmakers in particular have been squeezed by slowing sales in China, their most important market.

Porsche and VW chief executive Oliver Blume said it was still unclear whether demand for electric sports cars such as the Porsche Taycan would pick up. “Today, we don’t know,” he said, adding that at the moment the “luxury segment for electric cars [in China] does not exist”.

Mercedes-Benz, which in recent years has shifted its focus to more expensive models, sold 9% fewer cars in China in the first half of the year, compared with the same period last year. CEO Ola Källenius said the luxury goods market in the country was cooling, which he blamed partially on the country’s real estate crisis. “We don’t know how long it will take [or] what it will take for China’s consumers to regain that confidence.”

Bill Russo, the former head of Chrysler in China and founder of Automobility, said foreign automakers, excluding Tesla, “collectively failed to pivot when confronted with changing Chinese consumer preferences” towards electric vehicles.

However, Joey Wat, chief executive of Yum China, was more upbeat with investors this week, after the operator of Pizza Hut and KFC in China reported better than expected first-half results, with net income rising 8% to US$212 million.

“It seems quite fashionable these days to be bearish on China. But… even at current growth rates, China still accounts for almost one-third of the world’s annual growth,” she said, adding that there had been a “shift of growth” into the country’s “lower-tier” cities.

“Last year alone, China actually opened 400 shopping malls, mostly in Tier 2 and below… how many countries in the world these days [have] opened 400 shopping malls?”

But she did acknowledge that “business is tough right now” and did not expect the market to change this quarter.

Drinks group Anheuser-Busch InBev blamed a 15% hit to Chinese sales in the second quarter on weak consumer demand and bad weather in some parts of the country.

Chief executive Michel Doukeris said despite weaker consumer spending, the trend for drinking smaller amounts but of more expensive alcohol continued to hold in China. “I think that long-term fundamentals are still in place,” he said.

Executives and analysts also warned about the longer-term threat from the growing number of highly competitive Chinese brands.

Shaun Rein, managing director of Shanghai-based China Market Research Group, said although there were bright spots, many foreign brands faced strong domestic rivals. “A lot of the western brands are just being outcompeted by Chinese brands,” he said.

Written by: Edward White and Thomas Hale in Shanghai, Madeline Speed, Daniel Thomas and Claire Jones in London and Patricia Nilsson in Frankfurt

© Financial Times