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https://scmp.com/economy/china-economy/article/3031748/are-chinese-consumers-spending-less-rising-instant-noodle
Economy/ China Economy

China’s rising instant noodle sales revive debate over if Chinese consumers are spending less

  • Sharp recovery in sales renews talk of whether people are tightening their belts because of economic worries
  • Instant noodle sales slipped to 38.5 billion in 2016, but rose back to more than 40 billion servings last year – or more than 38.8 per cent of total global sales
Instant noodles are an iconic consumer product associated with China’s rapid industrialisation. Photo: Imaginechina

The sharp recovery of instant noodle sales in China has reinforced debate over a controversial economic topic: are consumers downgrading their consumption due to fears about the outlook?

The debate is important because the Chinese government is counting on consumer spending to help support the economy amid the trade war with the United States. If consumers hold back on their spending, it could mean growth may slow faster than expected.

Consumption of instant noodles in mainland China and Hong Kong started falling after 2014, partly because cheap takeaway meals were being heavily subsidised by food delivery start-ups. Instant noodle sales slipped to 38.5 billion servings in 2016, but rose back to more than 40 billion servings last year – or more than 38.8 per cent of total global sales, according to the World Instant Noodles Association. Analysts expect sales to rise further this year.

Instant noodles are an iconic consumer product associated with China’s rapid industrialisation over the last 40 years. Sales rose sharply in tandem with the rise in industrial workers and declined with the rise of the Chinese middle class, who used their bigger incomes to buy higher-end food products.

Because of their popularity and importance, instant noodle and car sales are often compared to gauge whether Chinese consumers are upgrading their spending – buying more expensive items – or downgrading their consumption by buying cheaper alternatives and saving more.

Chinese passenger car sales declined for 14 of the 15 months to August, according to the China Association of Automobile Manufacturers, citing data from the passenger car association. Analysts see this as an indication that the combination of the slowdown in income growth, higher debt levels and worries about the outlook for their jobs is causing consumers to be more frugal in their spending.

The debate comes as retail sales growth continued to slow down in recent months, with weakening car sales being the biggest drag, according to the National Bureau of Statistics. However, retail sales of food grew 10.6 per cent from January to August, which was higher than the overall growth rate of 7.5 per cent.

“In the last five years, the sales of instant noodles in China have risen back to 40 billion packets [per year]. Many improvements have been made in the industry, but no matter how much [the product] has changed, it’s still instant noodles,” Tao Dong, managing director of Credit Suisse Private Banking Asia-Pacific, wrote in a recent note.

“Their hot sales are not so much due to a big change in the product side than that there has been a big change in consumer preferences. Similarly popular now are low-end goods like preserved vegetables. On the other side is weak sales of luxuries such as cars,” Tao said. “Behind all this … is the consumption downgrade.”

Their hot sales are not so much due to a big change in the product side than that there has been a big change in consumer preferences. Similarly popular now are low-end goods like preserved vegetables. On the other side is weak sales of luxuries such as cars. Behind all this … is the consumption downgrade Tao Dong

Chinese state media, however, has worked hard to dismiss the idea that consumers are pulling back on their spending. Instead, it argues that the recovery in instant noodle sales is a success story of an improved product, meaning higher sales are really a consumption upgrade, because more expensive versions are being sold.

“The comeback of instant noodles and preserved vegetables is not because consumers have reduced their ‘consumption grade’, but rather companies have seized the market opportunity for Chinese people to upgrade their consumption through diversification and introduction of high-end goods,” an article in Communist Party mouthpiece People’s Daily said last month.

Tingyi Holding, the largest instant noodle maker in China, said in its latest half-year report that the sales value of its instant noodles rose 3.68 per cent from 2018 to 11.5 billion yuan (US$1.6 billion), according to its filing with the Hong Kong stock exchange. The sales growth was mostly due to “high-end” instant noodles, which could cost as much as 24 yuan per packet – more expensive than a restaurant bowl of beef noodles in some Chinese cities.

Meng Suhe, head of the government-affiliated Chinese Institute of Food Science and Technology, said in a recent speech that a diversified line of instant noodles was an example of a consumption upgrade. According to the institute’s calculation, the total value of sales by 22 major Chinese instant noodle manufacturers reached 51.5 billion yuan in 2018, up 3.3 per cent, while production rose 0.73 per cent to 34.4 billion servings.

But on a per capita basis, Chinese consumption of the product is still far behind that in South Korea. In China, about 29 servings were consumed per person last year, while it was 74.6 servings in South Korea.

Recent Chinese income growth, a major deciding factor for consumption, has been disappointing. Year-to-date growth of average disposable income slowed to 6.6 per cent in the first half, down from a high point of more than 8 per cent in 2014, according to the National Bureau of Statistics. Meanwhile, high-income families have enjoyed more growth in their wealth – due largely to investment income rather than salaries – than have lower and middle-income consumers.

But even high-net households have been more cautious about how they spend their money. A luxury consumer price index published by the Hurun Report, a consultancy focused on wealth and investment, dropped 0.3 per cent this year, the first decline since 2015, implying a slowing of demand.

“More than half of our commodity baskets [in the index] are imported products. With the depreciation of the renminbi [exchange rate], imported products are more expensive. We think this price index should rise [because of higher import prices], but in fact, the index has dropped a little,” Hurun said.

Tao from Credit Suisse noted that consumption was “built on future income expectations”. “The outlook for future income is uncertain, and consumer choices naturally become more cautious,” he said.