Watching orders dwindle as China’s housing market slumped, factory owner Zheng Weirong decided to take action and protect his steel business from the real estate downturn.
Betting on a tourism revival, he wound down a production line making metal bars in 2021 and shifted investment to producing container-sized cabins, often used as guest houses. The pivot paid off, with demand exploding last year after Chinese travel rebounded following the lifting of pandemic restrictions.
With 50 full-time employees, he’s aiming to increase revenue by 30 percent this year to around 130 million yuan ($18 million) — an ambitious target amid a slowing economy and faltering consumer spending.
“More and more people are pursuing travel or high-quality and beautiful things,” said the 38-year-old in the southern manufacturing hub of Guangdong. China’s consumption will gradually improve, he added.
Zheng’s success highlights a shift in Chinese consumption patterns, with people spending more on services even as they remain thrifty and refrain from splurging on goods. This has made services a bright spot in otherwise sluggish consumption, which has weighed on LVMH Moët Hennessy Louis Vuitton SE and prompted Apple Inc. to cut prices.
The data support this. Retail sales of services grew 7.5% percent in the first half of the year compared with the same period in 2023, while goods sales rose just 3.2 percent.
This presents both an opportunity and a hedge. With services at just about 50 percent of gross domestic product, the sector has plenty of room to grow before reaching the 75 percent level seen in the US or the European Union.
And with manufacturing cooling and threatened by tariffs, greater domestic consumption of services would help Chinese factory owners like Zheng withstand external shocks.
“From the central government to the local governments, everyone is trying to stimulate the economy and improve services,” he said. “People’s pursuit for a good life is also growing. It will definitely get better and better.”
Recognising the potential of the services sector and the need to identify domestic growth drivers, China’s cabinet — the State Council — announced sweeping measures on Saturday to improve the supply of services. The 20 key actions include boosting spending on dining, tourism, and accommodation for travellers.
The push came days after President Xi Jinping led a Politburo meeting last month calling for making service consumption a “key lever” of driving consumption.
“There’s certainly more room to develop China’s services sector” when compared to the US or other advanced economies, said Ernan Cui, China consumer analyst at Gavekal Dragonomics. However, she noted that Beijing’s policies are still tilted toward technology and manufacturing, and that more funding support is needed for the services sector.
Experience Economy
Tianshui, an ancient Silk Road hub in Gansu province, is a prime example of what economists call a boom in the “experience economy.” The town of some 2.9 million residents welcomed nearly four times as many tourists earlier this year after a video review of its spicy street food went viral. Over two months, the town booked 5.9 billion yuan in tourism income, double the tax revenue it earned in 2023.
An extensive high-speed rail network and increased car ownership have made it easier for people to explore lesser-known destinations like Tianshui or venture into the wilderness.
Sales of outdoor gear such as paddle boards and diving equipment more than tripled during the annual shopping festival in June from the previous year, according to Chinese e-commerce giant JD.com. Sales of road bikes, cycling jerseys and electric skateboards also more than doubled, the data showed.
“Shopping malls are very quiet these days. The outdoors offer richer experiences, and people like to be in nature now,” said Chen Xinyue, a 24-year-old saleswoman at a company making camping equipment in Xuzhou, Jiangsu province.
“Since the pandemic, many people have come to realise how fragile life is and prefer to live healthier and have fun,” she said.
This growing appetite for adventure is also reflected in the way people travel. Bookings for custom tours, which let small groups select their own routes, destinations, vehicles and food options, surged more than tenfold in the first seven months of 2024, according to Tongcheng Travel Holdings. That outpaced a 1.9-time increase in traditional group tours, despite the higher cost of custom tours.
“That shows travellers increasingly prize the privacy, security and individual experience of their trips,” the online travel agency said in a statement to Bloomberg.
Seizing the Moment
Desperate to offset declining revenue from land sales, regional governments are capitalising on the experience boom by sponsoring new cultural and sports activities to attract tourists and stimulate growth.
Rongjiang county in Guizhou saw success with its “village football league” — a carnival featuring soccer matches, ethnic music and dance, and fireworks display. More than 12 million people have visited the place since May last year, bringing in 13 billion yuan of tourism revenue.
It’s now courting investments from hotel chains in recreational vehicle parks and camping bases, while also lobbying for more frequent high-speed trains and football pitches. This strategy aligns with the State Council’s plan to expand sporting venues and host more events.
Services accounted for 45 percent of household spending last year, official data show. The share could climb to more than 50 percent by 2030, according to a projection from the China Institute for Reform and Development, a think tank based in Hainan province.
But consumer spending is still constrained by modest income growth and falling home prices, which make homeowners feel less wealthy. During a major five-day holiday in May, travellers took 28.2 percent more trips but spent only 13.5 percent more compared to the 2019 break. This indicates lower per-person spending than before the pandemic and points to a trend of consumption downgrading.
“The key to consumption recovery is the stabilisation of the housing market,” Macquarie Group Ltd. economists including Larry Hu wrote in a July 30 note.
With this in mind, service providers have kept prices unchanged despite rising costs for raw materials, labor and transportation — a Caixin survey this week showed — as they’re concerned about losing market share.
The competitive pressure keeps Zheng on his toes. To stay ahead, he spends the bulk of his time developing new products to cater to customer needs, and plans to eventually outsource everything except research and development, design and sales.
He, too, is part of a consumption shift, now choosing “practical and durable” products over the high-end items he once favoured.
“Everyone used to desire Maybachs or Mercedes-Benz, but now we’re all pursuing domestic new energy vehicles,” he said. “What we call a consumption upgrade may not necessarily be an upgrade in terms of spending more money.”
