Temu owner PDD’s warning sounds alarm on China’s economic growth

BEIJING - One of the last remaining bright spots for Chinese consumption is rapidly fading, as the nation’s economic malaise takes a toll on demand for even the most accessible of goods.

In the latest warning to global markets on the health of the Chinese economy, Temu’s owner PDD Holdings on Aug 26 surprised investors with an unusually gloomy outlook.

The e-commerce firm, which became a market darling with low-priced goods that helped propel sales and profits during China’s economic downturn, also reported revenue that missed estimates.

During a post-earnings briefing, chief executive Chen Lei mentioned at least eight times that revenue and profits must “inevitably” decline as economic growth slows.

“We are seeing many new challenges ahead, from changing consumer demand, intensifying competition, and uncertainties in global environment,” Mr Chen told analysts. 

He and his lieutenants were careful to stress they remained confident in Chinese consumption over the longer term, but the damage was done. PDD’s US-listed shares plunged 29 per cent on Aug 26 in their biggest fall on record, wiping out US$55 billion (S$71.7 billion) of market value. Its closest rivals Alibaba Group Holding and JD.com followed suit, sliding about 5 per cent in Hong Kong on Aug 27.

PDD’s warning stunned investors because the company was long viewed as the main beneficiary of a Chinese “consumer downgrade” – its low-pricing strategy on Pinduoduo domestically and Temu abroad was intended to appeal to cost-conscious shoppers at a time of unprecedented economic volatility. 

The disappointing results were the latest in a series of red flags about the Chinese economy. This week, popular fast-food chain Din Tai Fung – long one of the most popular restaurant brands across the country – revealed it was shutting more than a dozen outlets. In July, Starbucks disclosed a 14 per cent plummet in Chinese revenue in the June quarter.

While Starbucks and Din Tai Fung have long wrestled with volatile sentiment, PDD’s warnings were especially surprising given it encapsulated for years how cash-strapped Chinese consumers spurned luxury brands for lower-end alternatives.

Founded by former Google engineer Colin Huang in 2014, the company in past years has combined low prices with aggressive rural expansion and game-like elements on its platform to grab market share from Alibaba and JD. It parlayed that formula into the global e-commerce bargains app Temu, which it launched during the Super Bowl in 2023. That app has become a shopping phenom akin to Shein, becoming for a time one of the most downloaded US apps. 

That drove a remarkable sixfold gain in market value from the post-Covid-19 troughs of 2022, crowning Mr Huang China’s richest person in August. But he held the mantle for just 18 days, till Aug 27’s sell-off.

China’s less affluent consumers outside of glitzy mega cities drove much of PDD’s success. They are now a big source of uncertainty.

Consumption, a main driver of the economy, weakened this year after a rebound in post-Covid-19 reopening spending in 2023. Against the backdrop of widespread job and salary cuts as well as plunging property prices, Chinese consumers have turned more cautious with their spending, leading to intense price wars in sectors such as cars. 

Retail sales expanded just a little over 3 per cent in the first seven months of 2024, far worse than the 8 per cent-plus growth recorded in pre-pandemic times. Residents’ confidence in future income plunged to the worst level since the end of 2022, one of the most intense periods of Covid-19 lockdowns, according to a central bank survey conducted in the second quarter. 

Almost half of the residents polled said employment is “grim and difficult”, the highest proportion since the end of 2022. Nearly two thirds of those surveyed said they are willing to save more, hovering near an all-time high recorded in 2023.

For some investors, PDD executives were merely trying to contain expectations run amok. After all, it may be unreasonable to expect the company to keep logging 50 per cent-plus growth, as it’s done in all but one quarter on record. Wall Street was betting on PDD to almost double revenue during the June quarter. Instead, it rose 86 per cent. On Aug 26, its executives said they will make big investments to capitalise on future opportunities.

In the long run, much depends on the job market, and how Beijing steers the economy.

The authorities have sought to ensure there are enough jobs even as the economy slowed, calling on state-owned enterprises to expand recruitment and vocational training. But officials stopped short of providing more direct help to consumers, though many economists have called for a cash subsidy or consumption voucher for at least the low-income groups. They have also refrained from taking measures to support wage growth, which is essential to encourage more spending.

Regulatory crackdowns in a number of industries ranging from private tutoring to finance over the past few years have also worsened the job market.

For now, many investors are still counting on PDD to at least outshine its peers in a turbulent economy. “We believe PDD is the only Chinese e-commerce player that will outperform industry growth,” Morgan Stanley analysts wrote. BLOOMBERG