What: China used to compete with the rest of the world with its low prices. Now, it has become a national issue.

Why it is important: When someone competes on the price, there is always a newcomer with cheaper options.

Chinese retailers are increasingly focusing on lower-priced goods and services to attract cost-conscious consumers, a trend that risks entrenching deflationary pressures in the world's second-largest economy. This shift is in response to declining income growth and consumer spending. It includes strategies like price cuts, the opening of bargain stores, and the introduction of cheaper product versions, potentially leading to a cycle of reduced profit margins, limited wage growth, and weakened consumer demand.

For example, Haidilao, a major hotpot chain, has launched lower-priced outlets with more affordable menu options and reduced staffing costs. Similarly, Moutai, known for its expensive liquor, has introduced lower-priced latte and chocolate products. Retail giants like Walmart’s Sam’s Club and Alibaba’s Freshippo are engaged in a price war, significantly cutting prices on popular items.

The trend is affecting various product categories, leading to a decrease in average selling prices. This situation is raising concerns about parallels with Japan's "lost decades" of economic stagnation. Despite expectations of economic growth, the consumer sector is not feeling the benefits, with high youth unemployment and some workers facing lower wages. The rise of discount stores and significant price cuts by major brands reflect these changing market dynamics and consumer behaviour.

Chinese retailers’ pricing strategies risk ‘vicious cycle’ of low margins