Chinese restaurants eaten alive by diner deflation
Lifespan of an ordinary eatery is ‘500 days’ as profits plunge by 88% in the first half of 2024
Restaurants across China are being eaten alive by spiraling deflation. Amid the squeeze on consumer spending, the average lifespan of a mid-range diner is around “500 days.”
Even cost-cutting prices and creative menus have failed to “attract customers,” leaving eateries “struggling to survive.”
“Mid-range enterprises are more likely to go bankrupt,” Zhu Danpeng, an independent food analyst, said, referring to restaurants charging 100 to 120 yuan, or US$13 to $16, a person.
“They are not cost-effective,” he told the Reuters news agency at the weekend, with net restaurant profits plunging 88% in the first half of 2024.
The D-word:
- A record three million restaurants in China went out of business last year.
- Another casualty of the deflationary cycle triggered by the property meltdown in 2021.
- Chaos in the real estate sector has already “destroyed US$18 trillion of household wealth.”
- To put that into perspective, up to 70% of household wealth is tied up in property.
China risks falling into a self-reinforcing cycle.
Yuhan Zhang, Berkeley academic
Delve deeper: Last month, the consumer price index dropped below zero for the first time in 13 months. Data released in March by the National Bureau of Statistics showed that the CPI fell to 0.7%, compared to a 0.5% rise in January.
Between the lines: Still, the warning signs have been flashing since the end of the Covid-19 pandemic. Last year, Fitch Ratings pointed out that “deflation in China risked becoming entrenched.” It has.
What they said: “China’s economy is likely to [be] trapped in a deflationary cycle for an additional two years,” Junhua Zhang at the European Institute for Asian Studies wrote in a commentary for Geopolitical Intelligence Services or GSI.
Big picture: Berkeley academic Yuhan Zhang also warned that “China risks falling into a self-reinforcing cycle” in a Carnegie Endowment for International Peace commentary.
Bottom line: “As consumers and businesses hold off on spending and investment, deflationary pressures deepen, further depressing prices and economic activity,” he said.
China Factor comment: Fears are growing that China could suffer a Japanese-style “lost decade” after the property crash in the 1990s. Beijing has so far failed to tackle the root cause of the problem, an overcooked economy stewing in debt.