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One of the last bright spots left for consumption in China is rapidly disappearing, as the country's economic shortage has negatively affected demand for even the most accessible goods. In a recent warning to global markets about the health of the Chinese economy, Temu ⁇ 's owner PDD Holdings Inc. surprised investors with an unusually bleak outlook on Monday. The e-commerce firm, which became a favorite of the market with low-priced products that helped revive jobs during China's economic downturn, reported an income that fell short of forecasts. CEO Chen Lei said at least eight times in his post-earnings briefing that incomes and profits should inevitably fall as economic growth slows. Chen, who was also one of the first employees of PDD ⁇ , told analysts that ⁇ We are seeing many new challenges arising from weakening consumer demand, intensifying competition and uncertainties in the global environment ⁇ .

The CEO and his aides took care to emphasize that their long-term confidence in Chinese consumption continues. This balancing is a major priority for Beijing in rebalancing the world's No. 2 economy. But what's done is done. Shares of PDD ⁇ ⁇ wiped out its market value of $55 billion in a record decline. Its closest competitors Alibaba Group Holding Ltd. and JD.com Inc. followed suit. %4 lost its value.

Founded in 2014 by former Google engineer Colin Huang, the company has combined low prices with aggressive rural expansion and game-like elements on its platform to grab market share from Alibaba and JD ⁇ in recent years. He turned this formula into the global e-commerce bargaining app Temu ⁇ , which he launched during the Super Bowl in 2023. Temu, which has become a Shein-like shopping phenomenon, has been one of ABD ⁇ 's most downloaded apps for some time.

This increased the market value of PDD ⁇ by six times from the bottom level in post-Covid 2022, making Huang ⁇ the richest person in Çin ⁇ this month. Huang, however, held the title for just 18 days until Monday's sales. China's less affluent consumers outside its flashy megacities provided the bulk of PDD ⁇ 's success. They are now a source of great uncertainty.

Consumption, the main driver of the economy, weakened this year after a recovery in post-Covid reopening spending last year. In the face of widespread job and salary cuts, as well as falling property prices, Chinese consumers have become more cautious in their spending, leading to price wars in sectors such as cars. Chang Shu and Eric Zhu of Bloomberg Economics, China's e-commerce companies now face a problem that even hard price cuts can't solve: He was a weak consumer, he wrote. From a macroeconomic point of view, the decline in PDD shares points to an important point: Slowing revenue increases and damaged confidence are suppressing consumption. ⁇

Retail sales in the first seven months of 2024 %a little over 3 ⁇ , which was recorded in the pre-pandemic period. %It's much worse than growing above 8 ⁇ . According to a central bank survey in the second quarter, residents' confidence in their future income fell to its worst level since the end of 2022, one of the peak periods of Covid lockdowns. Almost half of the residents surveyed said employment was gloomy and difficult, the highest rate since the end of 2022. Almost two-thirds of those surveyed said they were willing to save more, hovering close to an all-time high recorded last year.

Lei signaled a fundamental shift in consumer behavior, moving away from cheap products that have increased revenue since its inception. In the earnings call, consumers make more careful decisions to balance quality and value. ⁇ In response, we have cooperated with high-quality brands and manufacturers to create customized products that meet these different demands. ⁇

For some investors, PDD executives were just trying to keep expectations from spiraling out of control. After all, as the company does in all quarters except for one. %It may be unreasonable to expect it to continue to grow above 50 ⁇ . Wall Street thought PDD would nearly double its revenue in the June quarter. Comes instead is up. On Monday, executives said they would make large investments to capitalize on future opportunities.

Brock Silvers, general manager of private equity firm Kaiyuan Capital ⁇ , said ⁇ PDD shows that reality will always show itself again ⁇ . In the current environment, the most prudent course of action is not to be exposed to surprises. It is better to announce bad news in advance than to risk being blamed for a later, greater collapse.

In the long run, a lot depends on the job market and how Beijing will drive the economy.

Officials urged public economic enterprises to increase recruitment and vocational training by trying to provide adequate numbers of jobs, even if the economy slows down. But authorities have refrained from providing more direct assistance to consumers, but many economists have called for cash subsidies or consumption checks, at least for low-income groups. They also refrained from taking measures to support the wage increase needed to encourage further spending. Regulatory pressures in a number of industries, from private tutoring to finance, have also made the job market worse over the past few years.

For now, many investors are confident that PDD ⁇ will at least surpass its peers in a turbulent economy. The results of PDD ⁇ mean ⁇ weak consumption and intense competition. According to Morgan Stanley analysts Eddy Wang and Kathy Zhu ⁇ , the management's comments that long-term profitability will decrease are too conservative for us. ⁇ We believe that ⁇ PDD ⁇ is the only Chinese e-commerce player that will outperform growth in the industry. ⁇