Experts: New Beijing Strategy Ineffective as 460,000 Food and Beverage Businesses Close

In the first quarter of 2024, 460,000 catering businesses in China closed down, marking a 232% increase compared to the same period last year. This wave of consumption downgrade has also impacted Hong Kong, affecting market dynamics and the economy. Experts analyze that the catering service industry is particularly sensitive to economic downturns, and current strategies in Beijing seem ineffective as China’s economy struggles to show signs of improvement, with longstanding issues in the country’s system and structure remaining unresolved.

Official data from China’s National Bureau of Statistics shows that in the first quarter of this year, 459,000 catering businesses were deregistered or revoked, with 167,000 closures in January, 112,000 in February, and 180,000 in March, a 232.6% increase from the previous year’s first quarter, which had only 140,000 closures.

Even well-known or long-established catering companies on the mainland have been closing their doors. For example, the leading brand in New Chinese baking, “Hutouju Zha Da Cake House,” applied for bankruptcy liquidation earlier this year. Mo Mo Dim Sum closed its company in February, once boasting over 60 stores nationwide during its peak.

American economist David Wong analyzed to Epoch Times, “The catering service industry is especially sensitive to economic downturns.” The harm caused to the catering service industry during an economic downturn is significant.

“Because compared to other industries, the catering service industry belongs to the realm of improving and enhancing life; it is not a necessity of life. So when everyone is struggling to even maintain basic needs and cutting back, they will certainly have little interest in these additional or high-end expenses.”

Official figures indicate that in March, the total retail sales of consumer goods only grew by 3.1% year-on-year, well below previous values and expectations. The Wall Street Journal remarked that China’s economy is teetering on the edge of significant deflation, reflecting the weakness of domestic demand in an economic environment where consumers are holding onto their wallets tightly.

Regarding the impact of the service industry downturn on the Chinese economy, David Wong analyzed that firstly, it will lead to a large number of people becoming unemployed. Secondly, the catering service industry is intertwined with activities in entire commercial districts, closely related to commercial real estate and services.

“From a market and consumer psychology perspective, widespread closures in the catering industry will intensify economic concerns and lead to particularly discouraging observable economic indicators,” “Also leading to significant market fears.”

Sun Guoxiang, associate professor at the University of Nanhua in Taiwan, also believes that the catering industry is a crucial part of Chinese consumption. However, consumers seem to be scrimping and saving, resulting in a continuous collapse of consumer confidence.

He expressed, “The impact of the service industry could lead to another wave of more severe unemployment. This wave of service industry unemployment may expand to various aspects, such as food delivery services. This signifies that the Chinese economy has been unable to rebound in terms of consumption and continues to deepen in severity.”

The recent trend of consumption downgrade has also hit Hong Kong. Local media reported that in Central, coffee was being sold for as low as 10 Hong Kong dollars per cup, with lattes priced as low as 18 dollars. In Mong Kok, ice cream was available for 5 dollars per cup, and lemon red tea for 11 dollars.

This “internalization” combined with “consumption downgrade” phenomenon has already erupted, bringing significant impacts to various industries. Even the IPO market is facing challenges of “internalization” and “downgrading.”

On April 23, China’s chain milk tea brand, Chabaida, debuted on the Hong Kong Stock Exchange, the largest IPO on the Hong Kong stock market this year. However, it opened below its offering price, plummeting over 38% at one point, and closing with a steep drop of nearly 27%.

In addition, the “first tea-drinking stock” listed on the Hong Kong stock market in June 2021, Naixue’s Tea, had an IPO price of 19.8 Hong Kong dollars at the time, with a market value of over 30 billion dollars. However, in less than 3 years, the stock recently closed at 2.26 dollars, plummeting by 89%.

David Wong believes that the downward pressure on Hong Kong’s overall economy may be even greater than that on the mainland. Hong Kong used to be the third-largest economic center in the world as Asia’s economic hub. However, Hong Kong has now slipped down the ranks.

He stated, “Many foreign institutions, especially those in the Greater China region, had their regional headquarters in Hong Kong in the past. Now, most have either downsized or exited Hong Kong. For Hong Kong as a whole, high-end and mid-range consumption has significantly decreased.”

Furthermore, Hong Kong used to be a financial services center, “but now a large number of foreign investments have shifted to Singapore and Japan, resulting in a substantial reduction in investment in Hong Kong. This is evident in the declining overall profitability and economic vitality of Hong Kong.”

Sun Guoxiang noted, “The market convergence between Hong Kong and mainland China has been increasing, meaning Hong Kong can no longer make defensive comparisons with the mainland market or make appropriate cuts.”

“Hong Kong’s stock market is increasingly homogenous with China’s market. In recent years, the liquidity in Hong Kong’s stock market has been declining. Not only Chabaida, but other Chinese companies listing in Hong Kong also face similar problems.”

Over the past three years of the pandemic, China imposed strict control policies, leading to a large number of business closures. After the pandemic, there were expectations for a Chinese economic recovery. Beijing has been trying to stimulate the economy, emphasizing new quality productivity and replacing traditional real estate resources with new forces, but with limited success.

David Wong believes that Beijing’s market support measures may not have fully played their expected market role yet for various reasons.

Firstly, China’s economy is mainly driven by exports, but with international relations in tension, the blow to China’s export industry is significant, affecting the engine and main driver of its economy.

“Also, we can see that the real estate market’s prosperity and China’s exports are completely synchronized.”

In March of this year, the new house prices in China saw the largest drop in over eight years, as the debt troubles of large real estate companies continued to suppress demand.

Real estate accounts for a quarter of China’s GDP, playing a significant role in Chinese wealth allocation, estimated to be around 70%. As property devalues, Chinese consumers become even more hesitant to spend.

While Beijing is shifting economic strategies, emphasizing new quality productivity, Wong noted, “This requires an increase in productivity or product quality. However, this reliance on current Chinese consumers who face higher taxes, lower social security, and lack sufficient funds to purchase such products poses a challenge.”

“In the end, these products must also be exported to other developed countries worldwide. With current tense international relations and trade, even if your new quality productivity soars, who will buy your products becomes a major issue.”

Moreover, Sun Guoxiang pointed out that, “China’s traditional internal markets are facing overcapacity, and the so-called new forces, such as electric cars or lithium batteries, solar panels, etc., are also experiencing overproduction scenarios.”

“This leads to vicious competition, breaking the cost bottom line, resulting in cutthroat competition where the profit margin for electric cars is very low, with less than 1000 RMB profit per car, indicating severe issues in the structure of the entire Chinese economy.”

Sun Guoxiang stated, “The imperfections in the Chinese market are affecting other countries. Chinese manufacturers are willing to produce despite low profits because of the substantial subsidies provided by the CCP. This has not only disrupted their own market but also created disturbances in the Hong Kong and even European and American markets.”

Regarding economic recovery, David Wong believes it is not just about a single policy or measure; rather, it should be a comprehensive and multi-faceted combined effect to comprehensively uplift the economy. Looking at individual aspects may not yield significant results currently.

Sun Guoxiang emphasized, “So it all comes back to the fundamental issues within the Chinese economy, meaning, the CCP has not improved its own structure and system significantly.”

“Recently, US Treasury Secretary Yellen visited China and suggested a better solution for China, involving ensuring protections for the elderly, implying that when the elderly are safeguarded, it boosts consumer spending within households.”

Sun Guoxiang mentioned that in the long term, China’s overall economy still returns to fundamental issues, necessitating continuous reform and openness, treating foreign businesses equally, etc., engaging in fair international trade. Fundamentally, it involves addressing the longstanding issues within the system and structure.