SHANGHAI (AdAgeChina.com) -- In early December 2008, Chinese President Hu Jintao warned fellow Communist Party members and countrymen, "In this coming period, we will starkly confront the effects of the sustained deepening of the international financial crisis and pressure as global economic growth clearly slows. [The slowdown will] steadily weaken our country's traditional competitive advantages."
This warning was delivered a month after the government announced a $586 billion economic stimulus package over the next two years. Was the speech last month a signal of extreme caution?
If so, the signals sent out from the top seem to be working. Stock markets and consumer confidence move because of a combination of two factors -- market fundamentals and popular sentiment. Thanks in part to reassurance from party leaders, retail sales during the first three days of 2009 rose 13% year-on-year in the midst of a global recession.
During those three days, the country's top 1,000 retailers generated cumulative revenue of 12.5 billion yuan ($1.83 billion). With only three weeks between the western new year and this year's spring festival, as Chinese New Year is called in officially atheist China, consumers have never had it so good.
Every store seems to have launched month-long discounts, and weekend crowds show few signs of abating.
This optimism could mask deep fear among the Chinese population though, a fear that encourages Chinese to shop, shop, shop now, while prices are down and they still have jobs. After all, the lunar holiday is a time for a traditional splurge. Who knows, after the Chinese New Year holiday is over, we might just have to tighten our belts?
This year is different for another reason. Are the hundreds of thousands of migrant workers, who are heading home already, afraid that when they return, they may find a lock on the factory door? Exports are down, and domestic consumption, which the government hopes to stimulate though its recovery package, will take some time to take off.
Making predictions in these uncertain times is risky business, but businesses must brace themselves for consumer caution. A large part of the increase in retail sales has been driven by deep discounting. Consumers may continue to find good deals as companies get rid of inventory piling up worldwide. How much the profit margins for those companies have eroded is not yet known.
Already, young people -- a much desired demographic for marketers -- have become more careful with their spending. A host of web sites help them keep track of their daily expenditure, allow them to compare their spending with that of others (indicating peer pressure working around not to spend) and to share ideas about how to cut back.
On the popular social networking site douban.com, nearly 600 participants share ideas about how to survive the week on 100 yuan ($14.62), such as cooking at home rather than eating out -- a tough decision in a culture dependent on traditional gatherings built around good food.
While urban China tightens its belt, everyone from Beijing to Wall Street is looking at rural and smalltown China to keep consumption on the rise. It's hard to predict what happens in rural China but recently, China Central Television's CCTV2 channel shared the story of a young man who has decided to spend Chinese New Year at home with his parents, making an effort to decorate the home and take his folks out to local restaurants, instead of the whole family going out of town.
He predicted he would end up spending RMB 2,000 ($292), about RMB 4,000 ($585) less than he usually spends during the holiday. The important thing, he said, was not to compromise on the fundamentals, in this case, a happy gathering.
Faced with a downturn, Chinese consumers across the board are reprioritizing their expenditure, making it absolutely necessary for companies to figure out what those priorities are, if they hope to survive the tough times.
Kunal Sinha is the Shanghai-based executive director of discovery, Greater China at Ogilvy & Mather, where he oversees the consumer insight and knowledge management function across all divisions of the agency. He is also the author of China's Creative Imperative: How Creativity Is Transforming Society and Business in China.
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