Policy- China's gold buying is sending prices to record highs amid economic uncertainties.
- China's consumers are hedging risks, avoiding luxury brands such as Starbucks and Gucci.
China's buying up a lot of gold, sending prices of the precious metal to record highs.
The consumption trend reflects risk hedging and a lack of confidence in the flagging economy that has been struggling to regain momentum since lifting on-off pandemic lockdowns.
It also reflects that there's money in the system — but Chinese consumers are just really not that keen on dropping their hard-earned cash at Starbucks or Gucci.
China's economy is facing multiple risks and uncertainties, including an epic real-estate crisis, stock-market volatility, geopolitical headwinds, and demographic challenges.
"With China's population facing rapidly aging demographics, Chinese households are trying to boost their retirement savings at a time when real estate and equity markets have been weak," Rajiv Biswas, an international economist who's also the author of "Asian Megatrends," told Business Insider.
Last year, China's demand for gold jewelry rose 10% from 2022 to 630 tons acquired, making the country the world's largest buyer of the commodity, according to the World Gold Council. China's demand for gold jewelry softened in the first quarter of this year because of the surge in gold prices but still held up well, according to the council.
Gen Z Chinese consumers ditch luxury for gold
Despite their rush into gold assets, Chinese consumers aren't running out to buy other stuff, particularly foreign imports.
This is a problem, particularly for luxury retailers, as China's demand for high-end products fueled supercharged growth in the industry for years.
This is no longer the case.
LVMH Moët Hennessy Louis Vuitton, the world's largest luxury group, reported in April that Asia's revenues outside Japan fell 6% in the first quarter compared with the same period a year ago.
Kering, a luxury retailer that owns brands such as Gucci and Yves Saint Laurent, issued a profit warning because of the challenging market in China.
In a reflection of how many shoppers fell out of luxury buying, Chinese shoppers were responsible for about 23% of luxury goods spending at the start of the year — down from 33% pre-pandemic, a Bloomberg analyst said recently.
China's consumers are buying cheaper domestic products
Even imports are taking a hit, with the coffee chain Starbucks reporting in April that a slower-than-expected recovery in China would lead to lower annual growth this year.
Starbucks CEO Laxman Narasimhan said in a first-quarter earnings call that many customers were being "more exacting about where and how they choose to spend their money."
Nomura analysts said in an April report that younger Chinese consumers had become "much less enamored with foreign premium products, and now seem to prefer low-cost domestic substitutes."
In the case of Starbucks, Luckin Coffee — China's biggest coffee chain — is aggressively putting out beverage deals at attractive prices to beat the American company.
Patriotism is also playing into the trend. That's true even for some products that are around the same price as imported ones, such as a recent surge in Huawei phone deliveries amid plunging iPhone sales and a similar trend with Tesla versus BYD electric vehicles, as the Nomura analysts noted.
China's painful economic transition, which is causing a bumpy economic outlook for its people, is contributing to this trend.
"As income growth slows, coupled with heightened unemployment risks, the high premium paid for foreign brands has become increasingly hard to justify," the Nomura analysts wrote.
China's GDP per capita is still expected to rise
Despite the gloom, there are green shoots in China's economy.
April data showed consumers in the country were buying fewer things — such as clothing, cosmetics, and jewelry — but they were spending on experiences.
Consumption in the "eat, drink, and play" categories of catering, tobacco and liquor, and sports and recreation outpaced headline consumption growth. Lynn Song, the chief economist for the Greater China region at the Dutch bank ING, wrote that this showed consumers had been "forgoing big-ticket purchases in favor of spending in these categories in 2024."
This preference for experience spending also spills over to the consumer sector. LVMH's chief financial officer, Jean-Jacques Guiony, said in April that more Chinese consumers were spending money outside their country as they resumed traveling.
Even so, Chinese consumers are still expected to retain their appetite for gold.
GDP by capita in the world's second-largest economy is also still expected to rise from $12,700 in 2023 to $18,000 by 2030 — which Biswas, the economist, said was likely to boost gold demand in the future.
The weak Chinese yuan is leading consumers to buy gold with their savings to hedge against currency risks.
China's savings rate was about 32% last year, compared with about 4% in the US, a McKinsey analysis of official data found.
"As consumer sentiment continues its slump, consumers prefer to sock their cash away in the bank rather than spend it, pushing the savings rate higher," McKinsey wrote in April.
The spot gold price is about $2,335 an ounce after it hit a record high above $2,400 on May 21.
There may be more upside for the yellow metal.
"Chinese households are increasingly confronted by the weak long-term Chinese growth outlook and the slumping prices in China's residential real estate market," Biswas said.
The economist said those woes would continue to drive investors, especially those looking to boost their retirement savings, to gold.