ChinaIndiaSupply ChainsCybersecurityUkraine Invasion

After two months of COVID lockdowns tanked the local economy, Shanghai residents might not be in the mood to go out and spend

June 1, 2022, 11:27 AM UTC

Shanghai residents celebrated on the streets as the clock struck midnight on Wednesday morning, announcing the city’s tentative reopening after weeks of tough lockdown measures. Shanghai Disneyland—which still has yet to reopen—livestreamed a light show to celebrate.

The city’s economy is also sputtering back to life. Traffic jams returned to Shanghai’s streets as workers returned to the office. And Shanghai’s shopping malls have reopened—albeit at 75% of capacity.

But the revelry may not extend to people’s spending habits.

“There’s a general pessimism in the air,” says James Yang, partner at management consultancy Bain & Company, with retail companies expecting “a down year in China and re-forecasting their sales expectations.”

Shanghai’s retail sales sank by 48.3% in April compared to a year earlier—far greater than the 11% decline recorded nationally over the same period.

Retailers hopeful that the end of lockdown would unleash two months of pent-up demand, or that newly freed residents would be desperate to gorge on a dose of retail therapy, might be disappointed by the financial capital’s muted return to normal.

Revenge spending

When China first implemented citywide lockdowns in early 2020 as a means to control the spread of COVID-19, Chinese consumers began to openly fantasize about what commercial comforts they would splurge on once their apartment compounds were unlocked again.

The frustrated consumers called their planned liberation purchases “revenge spending”—adopting a phrase reportedly coined in the 1980s, when Chinese consumers went on shopping sprees to make up for decades of economic depression under the Chinese Communist Party’s isolationist policies.

Although consumers returned to shops, however, they did not return with a vengeance, and it took months for cities to recover from lockdown. Wuhan, which endured a 10-week lockdown in 2020, did not report year-on-year growth in retail sales until a full year after its lockdown lifted.

According to Michael Pettis, professor of finance at Peking University’s Guanghua School of Management, Chinese lockdowns created an “unwanted increase in savings as China households were literally unable to go out and spend money.” But although the end of lockdowns might allow some of that spending to return “fairly quickly,” Pettis says returning demand will “never be enough to make up for the previous contraction in consumption.”

Instead, it may be better to think of revenge spending as deferred spending.

Consumers, after they leave lockdown, aren’t necessarily spending more than they would under normal circumstances, and may have even grown more frugal during their time inside. According to Jing Daily, terms like “panic saving” and “layoff wave” trended on Chinese social media during Shanghai’s lockdown—not terms that indicate a great hunger to go shopping.

“Consumer sentiment has been deteriorating since last year,” says Adam Wolfe, emerging market economist for Absolute Strategy Research, noting that the People’s Bank of China’s depositor survey showed that “household preference for more savings was at a record high in Q1 2022.”

Trickle down

Shanghai’s 50-point plan for recharging economic activity, announced last weekend, offered barely any support to individual consumers or households. Instead, the city’s measures mostly focus on supporting businesses, such as allowing them to defer some pension, tax, and rent payments, and offering subsidies that companies can use to pay for utilities or retain staff.

Unlike other Chinese cities, Shanghai’s government is not offering residents consumption vouchers to encourage spending, and is instead relying on the private sector to offer coupons to consumers.

The few consumption-driven measures that do exist are targeted toward purchases of large consumer goods, like home appliances or vehicles. For example, Shanghai is lowering its tax on vehicles and offering a $1,500 rebate for those seeking to switch to an electric car. That might help increase car purchases from the zero sales recorded in April, but if residents go out and buy cars now, it will more likely be a sign of “delayed consumption” rather than revenge spending, says Raymond Tsang, a member of Bain’s automotive practice.

“There will be high inflation and high unemployment in the coming period, and that may not be very positive for the auto sector,” Tsang says.

Shanghai’s focus on supporting businesses rather than consumers follows the paradigm set by national policy. China has rejected the method of universal cash transfers used in the U.S., Europe, and even Hong Kong, as Beijing officials worry that handing out cash directly to consumers will add to inflationary pressure.

On May 26, Premier Li Keqiang told officials that China’s uneven development made such large-scale cash transfers difficult, and that money was better served protecting companies, according to the South China Morning PostAs a result, most of China’s economic support is targeted toward business, including better access to financing, greater infrastructure investment, or loan deferments. 

The government’s focus on business means that “real loss of income for many Chinese workers” may keep consumption in a slump for a while, says Pettis. Consumption “cannot recover until all the workers are rehired and their salaries and waves restored. This is not going to happen anytime soon.”

Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.