Why Pinduoduo’s surprise growth may not be good news for China’s economy

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.

China’s 2023 domestic demand plan focuses narrowly on rural appliances and trade-ins, lacking meaningful reforms to boost household consumption.

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.

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