China’s Gold Rush Shows Consumers Still Have Money to Boost Economy

China’s economy faces a range of risks and uncertainties, including a major real estate crisis, stock market volatility, geopolitical headwinds and demographic challenges.

“China’s population is ageing rapidly and Chinese households are looking to boost their retirement savings at a time when real estate and stock markets are sluggish,” said Rajiv Biswas, an international economist and author of “The Future of China’s Economy.” “Megatrends in Asia” He told Business Insider.

China’s demand for gold jewellery rose 10% from 2022 last year, with 630 tonnes purchased, making the country the world’s largest gold buyer. World Gold Council. Demand for gold jewellery in China weakened in the first quarter of this year due to rising gold prices but remains strong. According to the council.

China’s Gen Z consumers ditch luxury goods for gold

Unlike the rush into gold assets, Chinese consumers are not rushing to buy more stuff, especially foreign imports.

This is especially problematic for luxury retailers, with China Demand for luxury goods It has been driving the industry’s rapid growth for many years.

This is no longer the case.

LVMH Moet Hennessy Louis Vuitton, The world’s largest luxury goods group said in April that first-quarter sales in Asia excluding Japan fell 6 percent compared with the same period last year.

Luxury goods retailer Kering, which owns brands such as Gucci and Yves Saint Laurent, issued a profit warning due to tough conditions in the Chinese market.

Reflecting how many shoppers have stopped buying luxury items, Chinese shoppers’ luxury spending fell to 23% earlier this year from 33% before the pandemic. Bloomberg analysts recently.

Chinese consumers are buying cheaper domestically produced goods

Imports have also been hit hard, with coffee chains Starbucks signals slower than expected recovery in China The company reported in April that its annual growth rate would decline this year.

Starbucks CEO Lakshman Narasimhan said during the company’s first-quarter earnings call that many customers are “becoming more selective about where and how they spend their money.”

Younger Chinese consumers “appear to be less interested in foreign luxury goods and now prefer cheaper domestic products,” Nomura analysts wrote in an April report.

In the case of Starbucks, China’s largest coffee chain, Luckin Coffee, has been aggressively running sales on drinks at attractive prices in an effort to beat the American company.

Patriotism is also a factor in the trend, even for some products that are roughly the same price as imports, such as Huawei’s recent surge in shipments of phones amid a sharp drop in iPhone sales.The same trend can be seen in comparisons of electric cars made by Tesla and BYD, the Nomura analysts added.

China’s painful economic transition has left its people with uncertain economic prospects, exacerbating this trend.

“With income growth slowing and unemployment risks rising, it is becoming increasingly difficult to justify the high premiums paid for foreign brands,” Nomura analysts wrote.

China’s per capita GDP is still expected to rise

Despite the gloomy picture, there are some bright spots in the Chinese economy.

Data from China for April showed that Chinese consumers are buying less material items like clothing, cosmetics and jewelry, but are spending more on experiences.

Spending in “eat, drink and play” categories such as catering, tobacco and alcohol, and sports and recreation outpaced overall consumer spending growth, a sign that “consumers are prioritizing spending in these categories and cutting back on big-ticket purchases in 2024,” he wrote. Lin SongHe is chief economist for Greater China at Dutch bank ING.

The preference for experiential consumption is also spreading to the consumer sector: LVMH Chief Financial Officer Jean-Jacques Guiony said in April that more Chinese are spending money abroad as they resume travel.

Still, Chinese consumers are expected to maintain an appetite for gold.

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

The fall of the Chinese yuan has prompted consumers to use their savings to buy gold to hedge against currency risk.

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

“As consumer confidence remains weak, consumers prefer to deposit cash in the bank rather than spend it, leading to rising savings rates,” McKinsey wrote in April.

of Spot Gold Price It is trading at around $2,335 an ounce, below the all-time high of more than $2,400 hit on May 21.

Gold may have further upside potential.

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

Economists said the woes would continue to drive investors, especially those looking to boost their retirement savings, into gold.