Tag: China Observation

China’s coffee consumption growth slows

Luckin Coffee, the largest coffee chain in China, posted 1.2% company-owned same-store sales growth for 4q25, which is weak.

During earnings call, Luckin says China’s coffee market is still in a rapid growing phase – is that so?

I think there is still room, but current “coffee intensity” is already like in a mature stage.

Starbucks reward members (35mn) consume 3-5 cups per month.

Luckin members consumes close to 342mn cups per month in 2025 (4.1bn cups annually) and close to 100mn monthly transacting consumers, which translate to over 3 cups per customer per month approximately.

Why there is still room (but may be hard to penetrate)?

1) Luckin’s 450mn customer base means there could be 1.5x to 2x room in China, excluding children and elderly.

2) If Starbucks can get 16k stores in US, Luckin may get up to 4x of that which is over 60k stores in China, or 2x from current 30k stores.

3) Starbucks Reward member is an underestimation of active consumers of Starbucks, which could be like 70-90mn. 4x of that gives you 210-360mn potential which is 2-3x from current 100mn for Luckin.

Why hard to penetrate?

1) lower-hanging fruit / easy regions already have footprint.

2) China has more “layers” of consumers; thus hard to have one-size-fit-all offering. There are more competitions in China. Can’t handle price sensitive and premium customers together.

When gov requires buyback vs when gov buys you back

When gov requires buyback

When gov invest money as LP, the GP usually requires investees to buy back after say 5 years, with annual rate of up to 8%.

The equity investment is essentially a 5-year convertible loan that carries interest rate.

If things go well, gov should never lose money on these investments.

When gov buys you back

In rare cases, gov may promise to buy you back – e.g. Shenzhen gov promises to buyback 保障性配售住房, it applies an annual discount of 1% or more.

You will earn a negative interest rate annually.

China’s currency policy

It’s a very keen observation and description by Kenneth Rogoff in his book Our Dollar, Your Problem that China prioritizes a USD exchange-rate objective over domestic inflation targeting.

What are the implications?

1/ Tighter capital movement control

The “impossible trinity” says a country cannot simultaneously have a fixed (or tightly managed) exchange rate, free capital movement, and independent monetary policy.

Since China uses the peg and China wants more independent monetary policy (when Fed raised interest rate last cycle in 2022, China didn’t follow), it has to have tighter capital movement control.

Or PBOC policy shall move more in-line with US Fed policy.

2/ Real exchange rate moves

With a mostly fixed nominal RMB/USD, the real exchange rate moves via the inflation gap:

If China inflation below the US, China gets a real depreciation (more competitive) even without nominal RMB weakening. This is what happened in the last few years, and foreigners will find traveling in China very cheap (e.g. Chinese hotel price).

If China inflation above the US, China gets a real appreciation (less competitive) even if the nominal stays “stable.”

3/ Intervention can force money/credit swings 

Defending the exchange-rate path often requires buying/selling FX:

When inflows are strong, the central bank buys USD and creates RMB liquidity (which can be inflationary/credit-boosting).

When outflows dominate, defending the rate can drain RMB liquidity (which can be contractionary).

4/ It tends to bias the economy toward tradables and away from household consumption

If the RMB is held weaker than it otherwise would be (or just “less strong” than productivity would imply), it functions like:

a subsidy to exporters/tradable producers, and

a tax on importers/consumers (imports cost more in RMB terms than under a stronger currency).

5/ Bigger reserves and bigger balance-sheet exposure to USD assets

Exchange-rate management usually accumulates FX reserves (especially in surplus periods). That brings valuation risk when USD moves, opportunity cost (low-yield reserve assets vs domestic needs), geopolitical/financial exposure to the dollar system.

China’s missing inflation in early 2000s

In Our Dollar, Your Problem, author raised this question – why China didn’t see a faster inflation it should see. The higher inflation rationale is that when tradable goods sector productivity rises fast, this part of the economy will attract more workers, presumably from non-tradable goods sector. Thus, wage should rise and likely at a faster pace than the productivity gain in non-tradable goods sector, which should result in higher inflation in non-tradable goods sector to counter labor inflation.

In the books, the author mentioned one plausible explanation, which was Chinese gov could move massive population from rural areas to cities and factories. The amount of inflow was so large that wage increases were not seen. Thus, there is lower than expected service inflation.

This sounds reasonable.

I have additional arguments on #why China didn’t see strong inflation in non-tradable goods sector.

1/ The high-end of services are not priced fairly in China.

Unlike more capitalism-driven societies, the high-end supply and demand are exchanged in non-monetary channels. E.g. think about the high-end healthcare senior gov officials may receive in China – that’s not charged at the “market price”. Thus, you can’t measure the inflation, if that doesn’t carry a “price”.

In additional, the high-end services may not be available to the public or openly marketed. Thus demand is lower than it should be.

2/ High-end demand is shifted abroad.

Chinese wealthy like to shop, travel and live abroad.

This lowers the inflation across the board.

Xiaomi smartphone GP may drop 30% given rising memory cost

Some simple calculation:

Xiaomi smartphone GPM was 12.6% in 2024, with 192bn revenue.

Xiaomi sold 1.64 billion smartphones that year.

The GP per handset is about 147 RMB in 2024

Across different smartphone models, memory cost is different, ranging from 50-500 per handset.

But in a nutshell, it’s about 12-18% of BOM.

It’s could be about 150 memory cost per handset for Xiaomi, which is similar to GP per handset.

Then if memory cost is rising 50-100%, the entire GP per handset could be at risk.

To offset, Xiaomi may increase prices for customers.

And as a large customer for memory chips, it may not receive full mark-up immediately.

In the end, maybe 1/3 of the memory cost impact of 120 need to be absorbed by Xiaomi.

Then GP per handset could be more like 100-110 RMB.

And as the price increases, volume could be impacted, plus the RMB appreciation recently (two-thirds of Xiaomi smartphone volume is overseas).

Total impact to Xiaomi smartphone GP could be like 65-75bn, or 25-30% negative impact from 2024 level.

Sea change?

1/ FSD approval in China.

I have seen various posts on Chinese social medias that Tesla FSD is being updated in China. Not many news mentions though. This was previewed by Elon Musk back in Nov 2025 and recently in Davos.

2/ TikTok US deal finalized

3/ Trump Administration Pushes Out Key Officials Focused on China Tech Threat – WSJ

4/ Medtronic and Mindray North America broaden strategic partnership

5/ H200 China approval after US approval

6/ BYD and ExxonMobil signed a long-term strategic cooperation memorandum on 26 January

 

—

Edit:

Jensen Huang on Jan 29 said H200 has yet to be approved in China.

Alibaba hits out in all directions

a) Delivery

Since 2025, Alibaba used massive subsidies to compete with Meituan.

b) Micro-loan facilitation

In 2025, the industry faced regulatory crackdown on high fees or high APR, while Alibaba’s Ant Group operates at lower APR segment.

c) OTA

Trip.com (previously CTrip), the leader in China OTA, is targeted by regulators recently for antitrust issues.

d) PDD

In e-commerce, the industry faced some scrutiny and PDD is being probed.

Consumption is a bigger component of China’s GDP than fixed investments

China’s fixed investments in past 5 years

China reported 社会消费品零售总额 Total Retail Sales of Consumer Goods (a narrower concept than consumption) is 501,202 亿元 in 2025, up 3.7% yoy.

China reported 社会消费品零售总额 is 487,895 亿元 in 2024.

From 2020 to 2025, fixed investments % of GDP has lowed from over 50% to 35%.

Meanwhile, 社会消费品零售总额 finally surpassed fixed investments in absolute amount in 2025, by a think margin.

Also see previous post on consumption: When we are saying China needs to boost household consumption

China has a large consumer market but where is growth

Online physical goods consumption cagr is almost 0% from 2023-25. [reported 6.5% and 5.2% growth in 2024 and 2025]

2023年，实物商品网上零售额130174亿元

2024年，实物商品网上零售额130816亿元

2025年，实物商品网上零售额130923亿元

Overall e-commerce growth, which is ~2% cagr 2023-25. [reported 7.2% and 8.6% growth in 2024 and 2025]

2025年，全国网上零售额159722亿元

2023年，全国网上零售额154264亿元

Ex-auto consumption growth is 3.3% cagr 2023-25. [reported 3.8% and 4.4% growth in 2024 and 2025]

2025年，除汽车以外的消费品零售额451413亿元

2023年，除汽车以外的消费品零售额422881亿元

Accumulated CPI is 0.5% from end of 2022 to end of 2025 (36 month).

 

Popmart, holidays and 犒赏经济

Recently, 犒赏经济 has become a hot topic in China. The related articles try to show resilience in consumption and suggest a way to lift consumption.

While I agree with the necessity of this concept, as consumption in China needs to upgrade to “quality consumption” as some may say, I think 犒赏经济 is also trying to avoid some other key issues.

1/ key examples of 犒赏经济 are also lipstick effect.

Usually these articles argue that the rise in blind box toy sale like Popmart is a form of 犒赏经济.

However, if you think about it, Popmart toy is also like high-end brand lipsticks – people are replacing large item luxury purchases (handbags etc.) with smaller items ($20).

The desire to buy luxury products still exist during a bad economy, but people choose to buy stuff that have less impact on their financials.

One common use case of Popmart toy is to attach it to luxury handbags. Adding the “attachment” makes people feel that the handbag is “new” , thus somehow replacing the need to buy a new one.

Other examples of 犒赏经济 can also be lipstick effect.

Buying a nice dessert on the way back home? That’s a replacement for a much more expensive dinner out.

2/ 犒赏经济 tolerates other negative effects on overall consumption like stress or off-times.

Some part of the 犒赏经济 is not to celebrate in my opinion.

The mental stress is usually mentioned as a cause of rise in 犒赏经济, but is that a good thing? Are economists going to argue that in order to drive 犒赏经济, more people need to feel the stress?

Plus, these articles avoided discussions of long working hours and short holidays.

Long working hours is limiting dinner consumption and other 夜间经济.

In most companies in China, young people only get 5 days of annual leave per years. In additional, many companies will ask why you take a leave, and there is no such thing as getting paid for unused leaves. I bet many European people would say that like hundreds of years ago.

In 1936, France introduced law for 2 weeks of paid leave for all workers. This is on top of 9 days of national holiday at that time. The 2 weeks was further raised to 3 weeks in 1956, to 4 weeks in 1969, and to 5 weeks in 1982.

Wonder why concert is more popular than traveling? Because concert is usually in the city or a weekend trip that doesn’t involve taking a leave.

Let me just stop here.

Overall there are huge potentials in consumption in China I believe, and the quality consumption is the way to go. But some limiting factors need to be addressed first.