Last month, Pinduoduo (PDD) reported surprisingly strong first-quarter results, with group revenue reaching 86.81 billion yuan (US$12 billion), exceeding Wall Street analysts’ estimate of 75.66 billion yuan. Net profit also saw a significant increase, reaching 28 billion yuan, up by 246 per cent year on year.
These results pleased overseas investors and shareholders. However, the success of an e-commerce company like PDD, which focuses on low prices and the low-end consumer market and helps businesses reduce inventories, may not be a positive sign for a Chinese economy seeking not just growth, but also structural transformation and common prosperity.
PDD is often compared to Taobao, but it is better known in China for its extremely low prices. The PDD app is filled with promotional slogans such as “billions of yuan of subsidies”, “lowest prices on the net”, and “last opportunity”. To access these promotions, consumers must share product links on social media platforms like WeChat or QQ and get their friends to click on the links. The low prices come at the cost of varying product quality. Social media is rife with complaints about PDD selling fake and low-quality products. In 2018, the China National Intellectual Property Administration commented on widespread fake products from PDD, suggesting the e-commerce platform and sellers should be held jointly liable.
Despite these issues, PDD has become China’s largest e-commerce company, surpassing the market capitalisation of Alibaba, which owns Taobao and the Post. This success can be attributed to changing consumer behaviour in response to the weak recovery of the Chinese economy and the end of the real estate bubble. With growing price sensitivity, an increasing number of Chinese consumers are willing to compromise on product quality to save on spending.
China’s 2023 domestic demand plan focuses narrowly on rural appliances and trade-ins, lacking meaningful reforms to boost household consumption.
Despite Pinduoduo’s strong growth, it seems Chinese consumers are prioritising lower prices over product quality, leading to compromises to reduce spending. Photo: Shutterstock
According to the World Bank’s China Economic Update in December, China’s consumer confidence index has been negative since 2022, primarily due to weak income growth and depressed consumer sentiment.
China’s consumption as a share of GDP rose from 34.6 per cent in 2010 to 39.1 per cent in 2019 and 37.2 per cent in 2022. But it is still considerably lower than the average of 45.5 per cent in upper-middle-income countries and more than 50 per cent in developed economies.
Although consumption has been driving economic growth, it remains structurally low, owing to low disposable incomes and high savings rate among Chinese households.
Furthermore, China’s overcapacity has led to a surplus of cheap goods on e-commerce platforms like PDD, and this overcapacity is linked to fierce competition and subsidies in strategic industries, like telecoms, electronics vehicles, and pharmaceuticals, all of which have received policy support in China.
The bursting of the real estate bubble and declining fertility rates have also led to reduced demand for construction materials. Businesses in the consumer goods industry prefer to reduce profit margins and sell on platforms like PDD to clear inventories, rather than invest in new capacity, even as borrowing costs have come down in the past year. This weakness in investment demand reflects deflationary expectations, which can be self-fulfilling and self-reinforcing once they form.
US Treasury Secretary Janet Yellen addressed the issue of China’s overcapacity in the production of electric cars, solar panels, and other clean energy products during her visit to China in April. Yellen emphasised that the US would not tolerate subsidised, low-priced Chinese imports harming emerging industries, similar to what had happened to the US steel sector a decade ago. She explained that the production capacity for electric vehicles and other supported industries in China have significantly increased despite weak domestic demand, leading to oversupply and artificially low prices. Yellen observed that actions taken by Chinese entities could impact international prices, potentially jeopardising companies in the US and other countries.
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America’s threat to drop trade rule may hurt China, Temu and itself
America’s threat to drop trade rule may hurt China, Temu and itself
And it is not just capital goods such as EVs that China is exporting. China’s consumer-facing companies have increasingly gone overseas in search of a new growth engine amid weak consumption recovery in China. For example, in September 2022, PDD launched its global e-commerce app, Temu, leveraging its established supply chain in China to compete with platforms like Amazon and eBay using a similar price competition and social media model. As a result, Temu became the most downloaded mobile app in the United States in 2023.
At the heart of the US-China trade tensions is the fact that Chinese supply far exceeds domestic and global demand. While export-oriented industrialisation has historically benefited China, the size of its economy today means that its overcapacity issues will have substantial effects globally. It is both in China’s and the world’s best interests for the largest producer to transition to a consumption-driven economy. This transformation can be achieved by developing a modern welfare system that suits China’s aspirations to soon become a developed economy, including adequate pensions, universal health insurance, and income support for the poor.
Dustin He is a Master of Business Administration (MBA) candidate at the Hong Kong University of Science and Technology. Donald Low is Senior Lecturer and Professor of Practice, and Director of Leadership and Public Policy Executive Education at the same university.
