Opinion | Why Pinduoduo’s Surprising Growth Might Not Be Good News for China’s Economy

Last month, Pinduoduo (PDD) announced surprisingly strong first-quarter results, with group revenue reaching 86.81 billion yuan ($12 billion), exceeding Wall Street analyst estimates of 75.66 billion yuan. Net profit also saw a significant increase, reaching 28 billion yuan, up 246 percent year-on-year.

These results satisfied foreign investors and shareholders. However, the success of an e-commerce company like PDD that focuses on low prices and the low-end consumer market and helps enterprises reduce inventories may not be a positive sign for China’s economy striving not only for growth but also for structural transformation and universal prosperity.

PDD is often compared to Taobaobut is better known in China due to extremely low prices. The PDD application is filled with promotional slogans such as “billions of yuan in subsidies”, “lowest prices online” and “last chance”. To access these promotions, consumers must share product links on social media platforms such as WeChat or QQ and encourage friends to click on the links. Low prices at the expense of different quality products. Social media is full of complaints about PDD selling counterfeit and low-quality products. In 2018, China’s National Intellectual Property Administration commented on the widespread counterfeiting of PDD products, suggesting that the e-commerce platform and sellers should share responsibility.

Despite these problems, PDD has become the largest in China e-commerce company, exceeding the market capitalization Alibaba, which owns Taobao and Post. This success can be attributed to changing consumer behavior in response to the weak market recovery Chinese economy the end real estate bubble. With increasing price sensitivity, an increasing number of Chinese consumers are willing to compromise on product quality to save on expenses.

China’s 2023 domestic demand plan focuses narrowly on rural appliances and exchanges, and lacks significant reforms to increase household consumption.

Despite Pinduoduo’s strong growth, it seems Chinese consumers are prioritising lower prices over product quality, leading to compromises to reduce spending. Photo: Shutterstock — Despite Pinduoduo’s strong growth, Chinese consumers appear to be choosing lower prices over product quality, leading to trade-offs in reducing spending. Photo: Shutterstock

According to world BankIn the December edition of China Economic Update, China’s consumer confidence index is negative from 2022, mainly due to weak income growth and deterioration in consumer sentiment.

China’s consumption as a share of GDP increased from 34.6%. in 2010 to 39.1 percent in 2019 and 37.2 percent in 2022. However, it is still much lower than the average of 45.5%. in upper middle-income countries and over 50 percent in developed economies.

While consumption drives economic growth, it remains structurally low due to low disposable incomes and high savings rates among Chinese households.

Moreover, overcapacity in China has led to a glut of cheap goods on e-commerce platforms such as PDD, and this surplus is linked to fierce competition and subsidies in strategic industries such as telecommunications, electronic vehicles and pharmaceuticals, all of which have received support political in China.

The bursting of the real estate bubble and falling fertility rates also led to reduced demand for construction materials. Consumer goods companies prefer to reduce profit margins and sell on platforms such as PDD to clear inventories rather than invest in new production capacity, even though borrowing costs fell last year. This weakness in investment demand reflects deflationary expectations, which, once formed, can be self-fulfilling and self-reinforcing.

During her April visit to China, U.S. Treasury Secretary Janet Yellen raised the issue of China’s excess capacity in producing electric cars, solar panels and other clean energy products. Yellen stressed that the United States will not tolerate subsidized, cheap imports from China that harm emerging industries, much like what happened to the US steel sector a decade ago. She explained that production capacity for electric vehicles and other supported industries in China has increased significantly despite weak domestic demand, leading to oversupply and artificially low prices. Yellen noted that actions taken by Chinese entities could impact international prices, potentially threatening companies in the market US and other countries.

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America’s threat to abolish trade rules could harm China, it and itself

China exports more than just capital goods such as electric vehicles. Chinese consumer-facing companies are increasingly looking abroad in search of a new growth engine amid a weak consumption recovery in China. For example, in September 2022, PDD launched its global e-commerce app Temu, leveraging its established supply chain in China to compete with platforms such as Amazon and eBay, using a similar model of price competition and social media. As a result, Temu became the most downloaded mobile app in the United States in 2023.

In the heart of Trade tensions between the US and China is the fact that Chinese supply far exceeds domestic and global demand. While export-oriented industrialization has historically benefited China, the size of its economy today means that overcapacity problems will have significant effects around the world. The largest producer’s transition to a consumption-based economy is in the interest of both China and the world. This transformation can be achieved by developing a modern social welfare system that meets China’s aspirations to soon become a developed economy, including adequate pensions, universal health insurance and income support for the poor.

Dustin is a Master of Business Administration (MBA) candidate at the Hong Kong University of Science and Technology. Donald Low is a Senior Lecturer and Professor of Practice and Director of Executive Education and Public Policy at the same university.