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Call it China’s barbell-shaped recovery. A visit to one of the shopping malls in Shanghai’s Lujiazui financial district offers a glimpse of the new purchasing patterns taking shape in the country as the effects of the pandemic ebb. At the swanky IFC mall, wealthy Chinese consumers stand in line waiting to enter shops like Hermès and Louis Vuitton, their patience a reflection of their undiminished appetite for top-end luxury goods. But at the same time, we spotted only a few people visiting other foreign clothing boutiques that are pitched towards middle-income customers. At another, more mainstream, mall across the street it’s a different picture. A food court in the basement offering cheap noodles, dumplings, and 40-renminbi ($5.50) lunchboxes is packed with white-collar workers during lunchtime. This hustle and bustle contrasts with the emptiness at high-end restaurants on the eighth floor, which used to be a popular destination for business lunches before the pandemic.

These scenes confirm a story emerging at our meetings with company executives and backed up by other data in China. Consumer demand now looks something like a barbell: fat at the low end and the high end - as shown in the strong sales of both luxury items and consumer staples - but squeezed thin in the middle. Frugality is on the rise among middle-class Chinese, worried about their job and income prospects. Despite this, individuals are more cashed-up than ever, depositing a record 11.9 trillion renminbi ($1.7 trillion) into banks in the first six months of this year. 

Demand is pent-up. Many people have become more cost-conscious, downtrading or even foregoing purchases, especially of discretionary products. Shoppers are focusing more than ever on quality and value, and comparing prices across several channels before making a decision. They flock to discount retail platforms where they can find big bargains via group buying. PDD Holdings, the company best known for its Pinduoduo app, reported a 58 per cent jump in revenue in the first quarter from a year earlier.

The frugality trend has also been reflected in spending data. Domestic tourism revenue during the Dragon Boat Festival in June was still 5 per cent below the same period in 2019, before the pandemic, according to a statement from the Ministry of Culture and Tourism. Similar spending during the Labour Day holidays in May was flat from the same period in 2019. According to the National Bureau of Statistics, China’s retail sales grew 3.1 per cent in June, slowing sharply from a 12.7 per cent jump in the previous month.

Conservative consumption

While pricing pressures ripple across the value chain, there are still plenty of categories and companies more likely to buck the broader spending slowdown as they find new ways to maintain or increase market share. The best examples we’ve seen come down to understanding consumers’ desire for healthier options amid busy lifestyles; that includes developing food, beverage and skincare products that meet both their aspirations and budgets - like the frozen food firm selling the convenience of ready-to-cook meals for consumers who want to enjoy dinner at home on busy weeknights. 

Honing in on demand 

Two companies we met recently in Shanghai, an online travel platform and an offline advertising company, are seeing the benefits of expanding to lower-tier cities after business and consumption activity rebounded with the reopening. Another, a cheese manufacturer, is trying to make gains in the underpenetrated market for cheese products, as young parents put more emphasis on nutrition, attracted by the high protein in a product historically uncommon in Chinese cuisine. A company making architectural coatings is providing high-end interior paints in stylish colours for the younger generation, while spending heavily on environmentally-friendly raw materials to produce non-toxic and odour-free products. A dairy company sees opportunities from China’s ageing population and is expanding adult milk powder production to meet increasing demand from senior citizens, who are richer than previous generations of elderly and are willing to spend more on healthy living in their retirement. 

In separate research trips to Hangzhou and Shenzhen earlier this year, we witnessed similar stories. 

Proya Cosmetics, one of China’s top domestic manufacturers of skincare products, is increasing its efforts to reach young consumers through direct-to-consumer marketing channels like livestreaming. In Proya’s headquarters, an entire floor is full of small livestreaming studios for different e-commerce platforms in China. And the company is planning to build even more. 

Nongfu Spring, a bottled water company, has expanded by positioning its products as not just for drinking directly but for use in brewing tea and making soup, capitalising on consumers’ growing awareness of the health benefits of high-quality spring water and mineral water. The company’s focus on health and Chinese tea culture in developing new products is helping it steadily gain market share.

Finally, BYD Auto, a leading electric vehicle maker, is working on technology upgrades to keep up with increasingly high expectations among drivers. Unlike many of its competitors, BYD also owns many parts of its supply chain, including EV battery production, which enables it to expand internationally by offering competitively priced products. 


China’s broader economic rebound has flagged in recent months, and consumer spending has undershot high expectations. The demand curve is bifurcated, and its shape looks more like a barbell or a letter K than a hockey stick. For brands outside of the luxury space, downtrading and value-seeking shoppers are driving even fiercer competition on both cost and quality. But as we’ve seen by meeting dozens of companies across the country, there are still plenty of unique strategies that can help build share in a difficult market. After all, lifting barbells makes you stronger.

Hyomi Jie

Hyomi Jie

Portfolio Manager

Ben Li

Ben Li

Monica Li

Monica Li

Director of Research