00:00A meltdown during a live stream by China's so-called lipstick king.
00:17The online influencer was responding to a fan who complained that 79 Yuan eyebrow pencils
00:24Li Jiaqi was promoting were too expensive. But the outburst would prove costly for Li,
00:30who earned his lipstick king title for once selling 15,000 pieces of the cosmetics
00:36in five minutes. He scrambled to try and retain his crown with this tearful apology.
00:54But it did not work. Overnight, 1 million of Li's 30 million followers dropped him.
01:07China's state-run broadcaster CCTV weighed in, publishing an op-ed saying live streamers who
01:14battled with consumers were destroying their own rice bowls. But does this one influencer's
01:20public relations crisis tell us something about wider changes in China's economy?
01:26And what do those changes mean for the rest of the world?
01:33Consumer sentiment in China has remained pessimistic despite the end of the COVID-19
01:39pandemic. In the first quarter of 2024, a survey by the country's central bank found more than
01:4660 percent of urban residents planned to save more money. Only 10 percent said they thought it
01:52was easy to find a job. Market analysts have also noticed the country's middle class and young
01:59professionals are changing their spending habits. The customer decision journey has become a lot
02:06longer. So when it comes to durability, price comparison, performance of the products they
02:14want to buy, I think such behavior changes happen not only because of sentiment, not only because
02:23they think saving money is cool, but because they really don't have much money or have a lot less
02:30money than before. So we are seeing salary and bonus cut in high growth sectors such as finance
02:37and tech. That is not to say there are no winners amid the current market trends. Some domestic
02:43consumer brands are benefiting from the shifts. A 2023 survey showed 70 percent of online shoppers
02:50in China go local when buying clothing, while over 90 percent buy snacks and beverages from
02:57home-grown businesses. They are more culturally relevant to the consumers and there's encouragement
03:04from the central government for people to buy more made-in-China, designed-in-China products.
03:09So that is one. And also traditionally Chinese consumers see local brands having less premium.
03:17But what is it like to be in the middle of all these changes? Yvonne works for one of China's
03:23tech giants. She joined back in 2017 when companies like her employer were known for
03:29hosting extravagant sales events and offering generous compensation packages. Yvonne asked us
03:36not to use her full name because she is not authorized to discuss internal company matters.
04:06But like at all parties, the music eventually stopped.
04:29As China's crackdown on tech continues, business leaders...
04:31This could be a more muted event this year against a backdrop of regulatory
04:34crackdowns in China. And some of the, I mean, the China stocks are just getting whacked.
04:38Chinese authorities initiated a regulatory storm targeting the country's big tech firms in late
04:452020, setting concerns that the major internet platforms were becoming too large and powerful.
04:52Authorities halted IPOs, launched antitrust investigations, and fined tech companies for
04:59data security and anti-competition violations. The companies, which once rifled their foreign
05:05counterparts in market capitalization, saw their share prices plummet. But the downward spiral
05:12has been reflected in more than share prices and news headlines.
05:17Yvonne says she started to feel the pinch in her career.
05:29China's
05:58consumer price index has remained at a low level for nearly one year due to weak demand.
06:05Its March consumer price index went up by just 0.1%. Factory gate prices have kept dropping
06:12for 18 months, adding the pressure of an oversupply of goods. To survive, many Chinese
06:19companies are eyeing overseas to sell their products, but are facing growing pushback
06:25in the United States and the European Union, who accused China of exporting overcapacity,
06:31especially in the new energy sector.
06:56Pettis, an economist based in Beijing, has long argued that China's economic model
07:15suffers from an over-reliance on investment-driven growth rather than domestic consumption.
07:21In 2022, consumption contributed to more than 50% of China's GDP. While that may seem like a lot,
07:29it lags behind domestic consumption in many major economies such as the US, Japan, and India.
07:37But given how tense the geopolitical environment is, it's very clear that that's not going to
07:42happen. The US is already expanding its manufacturing shares, so is Japan. India
07:49has made it very clear that they will not accept a reduction in their manufacturing share.
07:54So what are the possible outcomes of this economic debacle?
07:58Pettis says there are three potential scenarios.
08:06So rebalancing means that for the next few years or next few decades,
08:12consumption has to grow faster than GDP and investment has to grow slower than GDP.
08:18So one way that could happen is the good way, which has never happened in history.
08:24That is that China implements policies that drive up the growth in consumption
08:29to something like 7%. And this would allow them to bring the growth in investment down to 1 or 2%
08:37and still have GDP growth of over 4%. Could they do this? Yes, if they transferred about
08:441 to 2% of GDP every year from local governments to the household sector.
08:54That is that consumption growth drops a little bit, but investment growth drops a lot and GDP
09:01growth drops a lot. So in that scenario, consumption growth in China could continue at 4% a year.
09:09Investment growth would drop to maybe zero or even negative, but GDP growth would drop
09:15to around 2% or less a year. That's sort of the Japanese style adjustment.
09:24The third form of adjustment is sort of the way the US adjusted in the 1930s.
09:30The US in the first three years of the decade saw GDP contract by 35%. The US lost more than
09:39one third of its GDP. Household income contracted by half of that. Very painful, but notice that
09:47household income grew relative to GDP. The advantage of that adjustment is that it's very
09:54quick. The disadvantage, of course, is that it's politically very destabilizing and very painful.
10:00But how could China transfer income from the government to households?
10:04Patty suggests local governments could fund better social security programs that would increase the
10:10income of households, but it will not be an easy fit because many local governments are heavily in
10:16debt. From a cash flow point of view, yes, they're in serious trouble because they relied so heavily
10:23on the real estate sector as an alternative for taxes. But don't forget, local governments
10:30own a lot of assets. The poster child of bankrupt local governments is Guizhou, and Guizhou owns
10:39many things, including they own Mautai, one of the most valuable companies in China.
10:45So the question is, do local governments need to own all of these assets? No, in most countries,
10:52governments don't own so many assets. Can those assets be transferred directly or indirectly
10:58to the household sector to boost household income? In principle, yes. Politically,
11:04very difficult to do. But trade war and geopolitical tensions aside, for ordinary
11:09people like Yvonne, finding clarity and certainty in such trying times is the key to staying sane.
11:22The problem is that what's best for ordinary people is not best for the economy. What's best
11:50for ordinary people is to be cautious and to increase their savings. But if everyone increases
11:57their savings, that reduces demand. So the whole economy slows down. And in the end, nobody has
12:03any more savings. So it's very tough. This is why policy is so important. Depending on what
12:11policies Beijing implements, we could see very, very different outcomes. As China's young
12:18professionals cut back on spending and foreign leaders express concern about China's supposed
12:24excess production capacity, the way China manages its economic slowdown will significantly impact
12:31its domestic economic stability, its international relations, and life choices made by its people.
13:01you
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