1 Beijing sees opportunity in Iran crisis to encroach upon the global chemical industry
The global trade and economic system has been thrown into severe turbulence over the U.S.-Israel-Iran conflict in the Middle East. Dueling U.S. and Iranian blockades have effectively halted maritime traffic through the Strait of Hormuz, threatening to create serious energy supply shocks and other challenges in the near future.
The Middle East situation has presented the PRC — the world’s largest manufacturing and chemical-producing nation — with a major strategic opportunity to expand its influence over the global chemical industry. To that end, Beijing has introduced a series of policies and measures in recent weeks in what appears to be an effort to capitalize on the crisis.
Cancellation of export tax rebates for certain basic and lithium battery chemicals
The PRC Ministry of Finance and State Taxation Administration canceled export tax rebates for methanol, ethylene glycol, and lithium hexafluorophosphate (a core electrolyte material used in lithium batteries), effective April 1, 2026.
***
Analysis: Beijing’s objective appears to be using fiscal leverage to raise export costs and forcibly retain low-cost basic chemicals and key new-energy raw materials within the domestic market. This is intended to guarantee an overwhelming cost advantage for China’s downstream fine chemical and lithium battery industries.
Volatility in international oil prices drives sharp surge in domestic petroleum processing PPI
According to April 2026 data released by the PRC National Bureau of Statistics, producer prices in the petroleum and natural gas extraction industry surged by 28.6 percent year-on-year.
***
Analysis: The above data indicate that profit margins for China’s traditional petrochemical-based fine chemical sectors, such as plastics and synthetic fibers, are being severely compressed. As a result, industrial capacity is increasingly shifting toward inland coal chemical systems that are less exposed to fluctuations in international crude oil prices.
Beijing uses ‘coal chemical’ capacity as a strategic hedge
The PRC has activated its “coal chemical” industrial system to offset soaring global oil prices caused by disruptions around the Strait of Hormuz and the Middle Eastern energy shock.
According to a May 27 article by Investing.com, China has not rushed to purchase expensive replacement oil or massively draw down its strategic reserves despite the disruption of Middle Eastern crude supplies. Instead, in May China reduced refinery operating rates by around 5 percent (with short-term reductions potentially reaching 10 percent) and redirected refinery output toward transportation fuels such as gasoline and diesel rather than petrochemical feedstocks, restricted refined product exports, and increasingly relied on coal-derived chemicals to compensate for part of the supply shortfall.
China currently consumes between 250 million and 300 million tons of coal annually for chemical production. More than 70 percent of methanol production, 80 percent of urea production, and 80–90 percent of synthetic ammonia production in China are coal-based rather than dependent on natural gas or oil, unlike international industry norms. This enables Chinese chemical producers to continue expanding capacity and exports without bearing the cost pressures created by Middle Eastern oil price spikes.
China’s control over fertilizer exports
The PRC, one of the world’s largest fertilizer exporters, has tightened fertilizer export policies comprehensively since March 2026 in order to safeguard domestic food security and guarantee supplies for spring planting. Measures include the implementation of strict fertilizer export bans and rigorous quarterly quota management measures. Beijing’s fertilizer moves have triggered major chain reactions in international markets, sharply driving up fertilizer prices across South Asia (especially India) as well as Southeast Asia and Latin America, all of which depend heavily on Chinese fertilizer exports.
Recently, Beijing appears to be loosening up on its fertilizer export restrictions in what appears to be a bid to leverage its supply chain advantage. Reuters reported on May 27 that China has begun issuing a new round of urea export quotas to domestic producers. Consultancy StoneX noted that China’s urea exports in 2025 totaled 4.9 million tons, or below the historical range of 5 million to 5.5 million tons, which traditionally accounted for roughly 10 percent of global urea exports.
Beijing weaponizes core semiconductor chemicals
On May 2, 2026, the PRC Ministry of Commerce issued Announcement No. 21 of 2026, imposing temporary export controls on five Chinese companies accused of transferring sensitive technologies to the United States.
The controls were highly targeted, focusing directly on core materials used in semiconductor manufacturing processes, advanced catalysts, and high-end electronics supply chains — including high-purity electronic-grade hydrofluoric acid, electronic-grade ammonia, and industrial catalyst precursors. This means that any U.S.-bound shipments carrying such critical chemical materials must undergo strict case-by-case review and approval by provincial-level commerce authorities before loading.
Our take
1. The unresolved U.S.-Israel-Iran conflict has imposed profound cost shocks on the global petrochemical sector. Notably, the disruption of the Strait of Hormuz has severely impeded the normal flow of fertilizers, crude oil, and related chemical feedstocks. For example, helium extraction facilities in Qatar’s Ras Laffan Industrial City were reportedly damaged during the conflict, interrupting approximately 33 percent to 40 percent of global helium production capacity. Qatar subsequently invoked force majeure clauses for supply contracts with countries including China and South Korea for a five-year period.
Imported inflation from crude oil and petrochemical feedstocks has rapidly transmitted into China’s domestic industrial system. According to the April 2026 PPI data released by the National Bureau of Statistics:
- Petroleum and natural gas extraction prices rose 28.6 percent year-on-year.
- On a month-on-month basis:
- Petroleum and natural gas extraction prices increased 18.5 percent.
- Petroleum, coal, and other fuel processing prices rose 16.4 percent.
- Chemical raw materials and chemical products manufacturing prices climbed 8.3 percent.
- Chemical fiber manufacturing prices increased 5.6 percent.
Under the traditional petrochemical production model, plastics, synthetic fibers, and fine chemical producers dependent on naphtha feedstocks face severe margin compression. Chinese petrochemical giant Sinopec previously reported that its 2025 net profit fell by 36.8 percent, primarily due to weakening margins in petrochemical products and the growing substitution effect from new energy industries.
Facing elevated global oil prices, Beijing did not choose to aggressively deploy its strategic petroleum reserves, nor did it compel importers to purchase replacement crude oil at any cost. Instead, it adopted a strategy of “active energy control and demand management.” Between April and May 2026:
- China reduced refinery operating rates by 5 percent to 10 percent.
- Daily crude imports dropped sharply from the typical 11 million barrels per day to 9.3 million barrels per day in April.
- The CCP authorities imposed strict restrictions on refined fuel exports.
- Major refineries were instructed to suspend gasoline and diesel exports.
- Refining priorities were redirected away from chemical feedstocks such as naphtha toward ensuring domestic transportation fuel supplies.
This was not merely a defensive risk-control measure. Rather, Beijing intentionally cooled lower-end petrochemical export capacity while preserving strategic crude supplies for higher-priority sectors such as transportation fuel security. This deliberate contraction in traditional petroleum-based chemical production is accelerating the restructuring of China’s chemical industry toward a domestic coal chemical system that is largely insulated from international oil-price volatility.
2. The PRC’s ability to sustain chemical industrial production despite disruptions in petroleum-based supply chains rests on its globally unique modern coal chemical industry. Unlike Europe, the U.S., the Middle East, Japan, and South Korea, which largely rely on oil or natural gas feedstocks for chemical production, China has built a substitute chemical system based on its massive domestic coal resources.
Currently, China consumes between 250 million and 300 million tons of coal annually for chemical manufacturing. Under this framework:
- More than 70 percent of methanol production is coal-based.
- Around 80 percent of urea production relies on coal.
- Roughly 80 percent to 90 percent of synthetic ammonia production uses coal rather than natural gas or petroleum.
When disruptions in the Strait of Hormuz drove international oil and natural gas prices sharply higher, production costs for global petrochemical companies rose exponentially. Some chemical plants in Europe and South Asia were forced to suspend operations due to feedstock shortages or unsustainable electricity costs. By contrast, Chinese coal chemical enterprises benefit from relatively stable domestic coal supplies, creating a physical separation between their input costs and the global crude oil market. This has effectively produced an asymmetric global “cost depression zone.”
The layout of China’s coal chemical industry has allowed Chinese chemical producers to continue exporting industrial capacity aggressively at low cost precisely as foreign petrochemical competitors face disappearing profit margins and operational paralysis due to high oil prices. This positions Chinese firms to displace or acquire their global counterparts when the chemical industry faces widespread bankruptcies and other troubles in the scenario where the Middle East crisis is prolonged with no end in sight and oil and chemical feedstock prices remain elevated.
3. Beijing has implemented highly targeted fiscal interventions to prevent low-cost domestic coal chemical feedstocks from being excessively exported amid soaring global demand and profit incentives, as well as to preserve the cost competitiveness of downstream industries such as fine chemicals, textiles, and new energy manufacturing.
On January 8, 2026, the PRC Ministry of Finance and State Taxation Administration jointly issued the Announcement on Adjusting Export Tax Rebate Policies for Products Including Photovoltaics (Announcement No. 2 of 2026), formally canceling VAT export rebates for products including photovoltaics and phosphorus chemicals effective April 1, 2026. At the same time, export rebates were completely eliminated for more than 20 chemical products closely tied to pesticides, including glufosinate, L-glufosinate, acephate, and fluoro-benzamide insecticides. For battery-related products central to the new-energy industry, export rebate rates were reduced from 9 percent to 6 percent between April 1 and December 31, 2026, and are scheduled to be completely abolished beginning January 1, 2027. This effectively removed fiscal export subsidies for critical chemical products including methanol, ethylene glycol, phosphorus chemicals, and lithium hexafluorophosphate (a core lithium battery electrolyte material).
Beijing officially framed these measures as part of efforts to combat “involution-style competition” and international trade imbalances while promoting high-quality industrial upgrading. But under current geopolitical conditions, these policies objectively function as both a powerful “fiscal breakwater” and a domestic strategic stockpiling mechanism. The policies not only suppress uncontrolled export outflows but also stabilize domestic supply. Without intervention, surging international prices for methanol, ethylene glycol, and similar feedstocks could have incentivized Chinese producers to aggressively export products for arbitrage profits, draining domestic resources. By canceling export tax rebates, Beijing effectively raised export barriers and forcibly retained low-cost bulk chemical feedstocks within China.
Concurrently, the measures create a powerful downstream manufacturing advantage. By retaining key basic chemicals and new-energy materials domestically, China’s fine chemical, polyester textile, and lithium battery industries gain access to some of the world’s lowest raw material costs. While comparable firms in Europe, the U.S., Japan, and South Korea struggle with wartime inflation and soaring feedstock costs, Chinese-made products (including power batteries and chemical fibers) gain extraordinarily aggressive price competitiveness in global markets.
4. China, one of the world’s largest exporters of nitrogen and phosphate fertilizers, has long accounted for roughly 10 percent of global urea exports. In 2025, China’s urea exports reached 4.9 million tons. Following the outbreak of the U.S.-Iran war, the global fertilizer supply chain suffered severe disruption from geopolitical conflict, placing major import-dependent agricultural economies under intense pressure.
The partial closure of the Strait of Hormuz has led to a roughly two-month disruption in nitrogen fertilizer supply flowing through the Persian Gulf and a dramatic surge in global fertilizer prices (international nitrogen fertilizer prices rose from $484 per ton on Feb. 27 to more than $850 per ton by April). This has triggered severe crises in countries heavily dependent on fertilizer imports:
- Australia: Approximately 65 percent of Australia’s urea supply comes from the Middle East. After the war erupted, domestic urea prices reportedly doubled from around A$800 per ton to A$1,800 per ton, while diesel prices also surged sharply. This rendered winter wheat and canola cultivation highly unprofitable, with agricultural output projected to decline by 30 percent, further driving up food import prices across Asia.
- India: More than 40 percent of India’s urea and diammonium phosphate imports originated from the Middle East. As a result, New Delhi was reportedly forced in March to lobby Beijing to release fertilizer cargoes previously withheld under export restrictions.
Facing global fertilizer panic, Beijing imposed strict export restrictions and controls in March 2026. However, after the spring planting season concluded, the PRC commerce ministry demonstrated a highly flexible use of supply-chain leverage; Mainland media reported that major domestic producers including Yuntianhua, Hubei Yihua, Xingfa Group, and Luxi Chemical, had recently received export quotas. Nevertheless, China’s total urea export quota for 2026 was tightly capped at 3.3 million tons, including 2.97 million tons under state quotas and 330,000 tons under non-state quotas, significantly below the 4.9 million tons exported in 2025.
The CCP authorities’ micro-management of fertilizer quotas does not appear to be just commercial trade policy. Rather, it effectively transforms one of the world’s most basic food-security resources into a geopolitical leverage tool. Beijing has leveraged other countries’ dependence on Chinese coal-based fertilizers to implement selective and timed quota releases. For example, after diplomatic discussions, China reportedly permitted targeted fertilizer exports to Australia or partially released cargoes for India. This sends a clear signal to countries worldwide that Beijing is willing to work with them to resolve food security issues and crises, perhaps on the condition that they subsequently align with the PRC on geopolitical issues and other CCP interests.
5. Beyond bulk industrial materials and agricultural fertilizers, Beijing has adopted a “dual-track” defensive and retaliatory strategy at the upper end of the fine chemical industry, particularly in high-purity electronic chemicals and international petrochemical trade. This strategy involves both legal mechanisms to block the extraterritorial application of foreign sanctions and precise export controls targeting strategic materials.
Using domestic law to shield Chinese firms from U.S. sanctions
On May 2, 2026, the PRC commerce ministry issued Announcement No. 21 of 2026, formally introducing a blocking mechanism against unilateral U.S. sanctions. Invoking the PRC’s “Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures,” the order declared that China would neither recognize, comply with, nor enforce U.S. sanctions imposed on five Chinese petrochemical and fine chemical companies accused of participating in Iranian oil transactions.
This move legally protected major Chinese refining and downstream processing firms, enabling them to continue acquiring discounted energy supplies from sanctioned countries such as Iran during the disruption of global crude oil trade caused by the closure of the Strait of Hormuz. As a result, China’s fine chemical supply chain avoided substantial disruption from external sanctions pressure, while also complementing broader China–Iran diplomatic coordination, including Iranian foreign minister Abbas Araghchi’s visit to China.
Strategic export reviews on high-end electronic chemicals
Alongside legal protection, Beijing has simultaneously imposed administrative export controls on strategic materials. One significant example is the “weaponization” of high-purity electronic chemicals. High-purity electronic-grade hydrofluoric acid, electronic-grade ammonia, and ultra-pure sulfuric acid are indispensable for semiconductor wafer cleaning, etching, and chemical vapor deposition (CVD) processes. In these advanced sectors, global semiconductor production lines remain highly dependent on Chinese raw materials and strategic minerals, including fluorite used in fluorine production and high-purity tungsten powder.
These measures complement earlier Chinese export restrictions announced in January 2026 on dual-use exports to Japan, as well as the February 24 decision placing 20 Japanese defense-related firms, including Mitsubishi Shipbuilding, Kawasaki Heavy Industries, and IHI, onto export control lists.
On April 10, the PRC Ministry of Commerce and General Administration of Customs announced phased export controls banning exports of ordinary industrial sulfuric acid and smelting byproduct sulfuric acid beginning May 1. These products previously accounted for 95 percent of China’s sulfuric acid exports and were restricted to guarantee domestic spring planting and new-energy material supply. Meanwhile, for highly value-added electronic-grade and semiconductor-grade sulfuric acid, Beijing replaced general export permits with strict “special approval and case-by-case review” procedures. Although the PRC official framed these policies as measures intended to “protect the environment” and “promote high-quality industrial development,” in practice they constitute a highly targeted form of asymmetric technological pressure.
Semiconductor-grade hydrofluoric acid, ammonia, and sulfuric acid require extremely high purity standards and are consumable materials with limited shelf life. Overseas semiconductor fabs generally maintain safety inventories covering only four to six weeks. By imposing cumbersome provincial-level approval procedures, Beijing can extend export clearance timelines from days to months without formally declaring a full embargo. Under conditions of Hormuz Strait disruption and broader shipping instability, this effectively functions as a form of “targeted slow suffocation” against semiconductor manufacturing supply chains in North America and East Asia, directly countering Western restrictions on advanced chipmaking equipment and technologies. In effect, while Western countries have constrained the PRC through control of semiconductor manufacturing “equipment” (such as lithography systems) and “software” (EDA tools), China retains significant leverage over the “blood” (electronic chemicals) and “bones” (critical minerals) required for semiconductor manufacturing. Even if Western governments maintain long-term policy consistency across electoral cycles, rebuilding fully independent strategic supply chains outside China would likely require many years.
6. In sum, Beijing appears to be taking advantage of the global energy crisis resulting from conflict in the Middle East to reshape the global chemical industry.
Domestically, the PRC has accepted short-term increases in petrochemical PPI inflation while rapidly decoupling domestic refineries from expensive international crude markets. Beijing has simultaneously activated its coal-chemical industrial “flood barrier” — a low-cost, high-capacity alternative system — while using export tax rebate cancellations to retain coal-based bulk feedstocks and battery-related chemical materials within China, thereby preserving ultra-low input costs for downstream manufacturers. Externally, China is leveraging this vast chemical-industrial shield to transform fertilizer exports such as urea into politically charged supply-chain “water gates,” influencing agricultural security and geopolitical alignment across South Asia and Latin America.
At the same time, Beijing seeks to preserve trade channels with sanctioned energy states through legal instruments such as the Ministry of Commerce Announcement No. 21. In advanced technology sectors, China is establishing a new form of geoeconomic pressure through phased export restrictions and case-by-case reviews on semiconductor-critical chemicals such as electronic-grade hydrofluoric acid, high-purity ammonia, and ultra-pure sulfuric acid. This industrial expansion strategy centered on “cost decoupling, domestic stockpiling of raw materials, selective supply releases, and precision choke-point controls” suggests that Beijing is steadily pursuing a non-military expansion of influence across global supply chains, ranging from low-end agriculture to advanced semiconductor manufacturing.
Within this strategic contest, if Western countries fail to rapidly establish alternative supply chains independent of China, and instead continue accommodating Beijing for short-term economic interests, the balance of power within the global chemical industry could increasingly and perhaps irreversibly tilt toward the PRC.
2 More signs emerge to suggest shrinking consumption in China
China’s consumer and e-commerce giants release Q1 results
In mid-May, three major Chinese consumer and e-commerce companies listed in either the U.S. or Hong Kong markets released their financial results for the first quarter of 2026.
Alibaba and JD.com (May 13)
The first-quarter earnings reports of Alibaba Group and JD.com suggest that China’s domestic e-commerce market has entered a period in which sales volumes remain resilient, but profitability is increasingly under pressure.
Alibaba (Taotian Group):
- Alibaba’s gross merchandise volume (GMV) maintained double-digit growth of around 10 percent.
- However, growth in Alibaba’s core customer management revenue (CMR), which includes merchant advertising and commissions, rose only 1 percent, significantly below GMV growth.
- This divergence indicates a systemic decline in average transaction values and a continued shift in consumer traffic toward low-cost, unbranded products.
JD.com:
- JD.com’s revenue grew 4.9 percent year-on-year to reach approximately $45.8 billion.
- Revenue from electronics and home appliances declined sharply by 8.4 percent.
- General merchandise revenue increased 14.9 percent. But this growth was supported by aggressive promotional measures, including lowering the free-shipping threshold from 99 yuan to 59 yuan and expanding large-scale subsidy programs to retain middle-class consumers.
Pinduoduo (May 22)
Pinduoduo released a highly anticipated earnings report that fell significantly short of Wall Street expectations, raising concerns that domestic advertising monetization has reached a ceiling. The company’s U.S.-listed shares fell more than 10 percent in a single trading session following the announcement. Key figures included:
- Total revenue increased 11 percent year-on-year to 106.2 billion yuan, below market expectations of 109.82 billion yuan.
- Online marketing services revenue (domestic advertising) increased 2.5 percent year-on-year to 49.9 billion yuan, indicating near-stagnant growth.
- Transaction services revenue (commissions and Temu-related business) increased 20 percent year-on-year to 56.3 billion yuan, surpassing advertising revenue to become the company’s largest revenue source.
- GAAP net profit decreased 15 percent year-on-year to 12.5 billion yuan.
- Earnings per share were 9.51 yuan, substantially below the market expectation of 16.77 yuan (representing a shortfall of 43.3 percent).
Wall Street research firm ends coverage of China’s consumer sector
On May 27, Melinda Hu, a Hong Kong-based Asia consumer analyst at the global asset management and research firm Bernstein, announced the complete termination of the firm’s research coverage of China’s consumer sector. The discontinued coverage includes leading companies across multiple consumer segments, such as:
- ANTA Sports
- Li Ning
- Gree Electric
- Midea Group
- Proya Cosmetics
- Giant Biogene
- Pop Mart
The statement noted that all previous research reports, ratings, target prices, and earnings forecasts should no longer be relied upon.
Commenting on the development, East Money Research Institute chief strategist Chen Guo said, “Recently, extreme signals have been occurring frequently. Chinese consumer stocks are in all likelihood at a historical bottom.”
NYT says falling pork prices are an ‘ominous sign’ for China’s economy
On May 28, The New York Times cited data from China’s National Bureau of Statistics and research from Nomura Holdings in arguing that persistently weak pork prices reflect both the downturn in the property and infrastructure sectors and increasingly defensive consumer behavior among the middle class. Key points in the Times report include:
- Pork prices have fallen by a cumulative 39 percent over the past four years per NBS data.
- Hannah Liu, a China economist at Nomura, told the Times that two major pork-consuming groups, construction workers and restaurant diners, have experienced a structural decline in spending.
- Data also indicate that the geopolitical tensions and conflict involving Iran that intensified in April 2026 contributed to higher global energy costs, resulting in only modest cost-driven increases in pork prices rather than any genuine recovery in consumer demand.
China’s courier industry sees rising volumes & falling prices
Data released by the PRC State Post Bureau and mainland media reports on April 22 highlighted a growing phenomenon in China’s physical commerce sector, namely, expanding shipment volumes accompanied by collapsing profitability (“垃圾訂單充斥、利潤全面清零”). To address worsening competition, the local authorities in provinces such as Sichuan and Guangdong reportedly introduced “anti-involution” measures in early 2026, including minimum delivery-fee standards.
Some noteworthy figures include:
- National parcel delivery volume increased 5.8 percent year-on-year to reach 47.73 billion packages in the first quarter of 2026.
- Last-mile delivery fees fell by around 15–20 percent compared with previous years.
- In some central, western, and rural regions, delivery compensation dropped to as low as 0.5–0.6 yuan per parcel, contributing to the closure of numerous local franchise outlets.
- During spring 2026, regulators reportedly required courier companies such as ZTO Express, YTO Express, and J&T Express to collectively raise delivery fees by 0.1 yuan per package as a stabilization measure.
Our take
1. Foreign securities firms have publicly attributed the decision to discontinue coverage of China’s consumer sector to the departure of senior analysts — a common technical explanation. This explanation is unconvincing. In both buy-side and sell-side research, if a sector still offers strong growth prospects and predictable free cash flow generation, institutions rarely abandon coverage of an entire national market simply because a single analyst leaves. The standard practice would be to recruit a replacement and maintain continuity of research services.
Viewed from this perspective, foreign securities firms are no longer covering China’s consumer sector because they believe that the marginal value of research has declined sharply in the eyes of international investors. What was once regarded as a high-growth, high-multiple investment theme has increasingly come to be viewed as a low-growth, low-profitability sector with characteristics more akin to a defensive utility investment. As trading activity and investor interest diminish, the costs of maintaining analyst coverage may no longer be justified by the potential commission and investment-banking revenues generated from the sector. As a result, some institutions appear to have concluded that continuing broad coverage is no longer economically worthwhile.
2. The New York Times’ characterization of collapsing pork prices as an “ominous sign” for China’s economy reflects concerns about weakening purchasing power among lower-income households.
The prolonged downturn in the property and infrastructure sectors has reduced employment opportunities for groups that traditionally account for a significant share of mass-market meat consumption, such as construction workers and migrant laborers. At the same time, intense competition in service industries such as restaurants, e-commerce logistics, and food delivery has placed downward pressure on wages.
When lower-income consumers begin cutting spending even on relatively inexpensive staple proteins such as pork, it may indicate broader weakness in household consumption. From this perspective, sustained declines in pork demand can be interpreted as evidence of deteriorating spending power among large segments of the population.
3. The first-quarter earnings reports of China’s major e-commerce platforms point to intensifying competition, which in turn places significant pressure on profitability throughout the retail ecosystem.
Alibaba
Alibaba reported quarterly revenue of 243.38 billion yuan, representing a modest year-on-year increase of 3 percent. However, operating profit deteriorated sharply, moving from 28.47 billion yuan in the same period last year to an operating loss of 848 million yuan this year. More importantly, customer management revenue, which includes merchant advertising and commission fees, grew by only 1 percent from the previous year.
According to the company’s disclosures, traffic was increasingly directed toward lower-priced, value-oriented products. In addition, certain merchant subsidies were recorded as offsets against revenue rather than marketing expenses. These measures suggest that Alibaba has been sacrificing monetization efficiency in order to remain competitive in an increasingly price-sensitive marketplace. The result is a business environment characterized by growing transaction volumes but significantly weaker profit generation.
Pinduoduo
PDD’s first-quarter results marked a notable slowdown relative to its historical growth trajectory. Total revenue increased 11 percent year-on-year to reach 106.2 billion yuan, falling short of market expectations. Non-GAAP net profit declined 17 percent year-on-year to 14.1 billion yuan, substantially below analyst forecasts. The most significant indicator was online marketing services revenue (primarily advertising paid by merchants) which increased only 2.5 percent year-on-year to 49.9 billion yuan.
Within China’s e-commerce ecosystems, advertising spending generally reflects merchant’’ expectations regarding future sales and profitability. The stagnation of advertising revenue suggests that many small and medium-sized merchants are facing increasing pressure on margins and are becoming less willing or able to invest in marketing. As competition intensifies around ultra-low-price strategies, Chinese merchants appear to be prioritizing survival and cash preservation over customer acquisition spending. This dynamic has raised concerns among investors about the sustainability of PDD’s domestic growth model.
JD.com
JD maintained low-single-digit revenue growth but continued to rely on aggressive promotional measures to retain customers. The company lowered its free-shipping threshold (from yuan 99 to 59 yuan) and expanded its large-scale subsidy programs. At the same time, first-quarter spending on technology and systems development increased significantly.
This suggests that JD is attempting to offset margin pressure through greater automation, logistics optimization, and technological efficiency gains. By reducing operating costs across warehousing and last-mile delivery networks, the company seeks to preserve profitability while competing in an environment increasingly dominated by discounting and value-oriented consumption.
4. The widespread downshifting of consumer spending in China is rooted in profound and potentially irreversible structural shifts in the country’s economic and social foundations, including household saving behavior, employment patterns, demographics, and labor mobility.
Households have entered a defensive savings era
According to financial statistics released by the People’s Bank of China in January 2026, total household deposits reached a record 166 trillion yuan at the end of 2025, roughly triple the level of a decade earlier. Per-capita deposits stood at around 118,000 yuan. Notably, time deposits accounted for 73.4 percent of total household deposits, the highest proportion on record, signaling the arrival of a distinctly defensive savings era. In sharp contrast, new household borrowing totaled only 441.7 billion yuan in 2025, the lowest annual figure since 2007.
Financial data for the first four months of 2026 indicate that households’ defensive saving behavior not only continued the trend seen at the end of 2025, but became even more pronounced through credit contraction as families actively deleveraged and reduced borrowing. For instance, household loans did not increase and instead recorded a net decline of 490.2 billion yuan. On the deposit side, household deposits rose by 5.74 trillion yuan. Although this was slower than the 7.83 trillion yuan increase recorded during the same period in 2025, the broader picture becomes clearer when combined with the contraction in household lending. Taking into account the net reduction in loans, households effectively withdrew and redeposited a net 6.23 trillion yuan into the banking system during the first four months of 2026. This suggests that the household sector’s defensive balance-sheet behavior has actually intensified, with families prioritizing debt repayment and precautionary savings over consumption and new borrowing.
About 76–77 trillion yuan in time deposits are scheduled to mature in 2026, including roughly 25 trillion yuan in high-yield deposits. Yet stress tests conducted during 2025 indicated that even as deposit rates declined significantly, rollover rates remained close to 90 percent. These figures suggest that Chinese households are engaged in aggressive deleveraging and balance-sheet defense. Even under an accommodative monetary policy, funds are not flowing into consumption. Instead, households continue to lock money into long-term deposits despite increasingly low returns. This indicates that monetary policy transmission into consumer spending has become severely impaired, exhibiting characteristics commonly associated with a liquidity trap.
Labor mobility is declining while the workforce ages
China’s 2025 Migrant Worker Monitoring Survey Report published by the National Bureau of Statistics points to a fundamental shift in labor mobility patterns. In 2025, the number of migrant workers moving across provincial boundaries declined by 750,000, while intra-provincial migrant workers increased by 2.1 million. At the same time, the migrant-worker population continues to age. Meanwhile, government agencies including the Ministry of Agriculture and Rural Affairs have emphasized the need to prevent large-scale “return-home unemployment” and prolonged rural stagnation.
These developments suggest that the labor absorption capacity of China’s coastal manufacturing centers and infrastructure hubs has weakened substantially. Many displaced workers have either returned to their hometowns or remained within their home provinces. As cities lose large numbers of highly mobile consumers and rural regions struggle to generate economic dynamism, demographic aging becomes increasingly important. Older populations tend to exhibit higher savings rates and lower consumption intensity, reducing the overall vitality of consumer demand.
5. When weaknesses in demand, supply conditions, and social structure reinforce one another, they can generate one of the most challenging economic phenomena: a deflationary spiral.
The process can be summarized as follows: Weakening expectations → Defensive household savings → Collapse in consumer demand → Price wars among merchants and platforms → Erosion of corporate profits and advertising spending → Layoffs and wage reductions → Further income declines → Even stronger deflationary expectations
This framework helps explain the apparent contradiction in China’s parcel-delivery sector. Although nationwide express-delivery volumes increased by 5.8 percent year-on-year during the first quarter, many delivery stations and couriers continue to struggle financially or exit the market. Moreover, the increase in parcel volume may not necessarily reflect stronger consumer demand. Instead, consumers are increasingly splitting purchases into multiple smaller transactions while searching aggressively for the lowest available prices across platforms. As a result, package volume continues to rise even as the profit generated by each transaction declines.
The CCP authorities’ decision to impose minimum delivery-fee standards rather than relying solely on market forces provides indirect evidence of these pressures. Left entirely to market competition, intense price-cutting and self-reinforcing deflationary dynamics could threaten the viability of delivery networks and the livelihoods of workers within the sector. Administrative intervention has therefore been used as an anti-“involution” measure to stabilize the industry.
6. Investors may need to look beyond headline aggregate indicators and focus on measures that better capture underlying economic conditions when assessing China’s economy and retail sector going forward.
i) Instead of concentrating on gross merchandise value or parcel volume, greater attention should be paid to monetization metrics such as customer management revenue, average selling prices, merchant advertising spending, and platform take rates.
In a deflationary environment, rising transaction volume can coexist with falling profitability. A sustained recovery in monetization rates and average transaction values would provide stronger evidence of improving business fundamentals.
ii) Headline consumer inflation can sometimes be influenced by external cost shocks, particularly energy prices. Analysts may therefore find it useful to monitor indicators such as pork prices, restaurant same-store sales, retail foot traffic, and service-sector spending.
If food consumption and restaurant sales remain weak despite modest CPI increases, it may indicate that underlying domestic demand remains subdued.
iii) The absolute size of household deposits is less informative than how households behave when deposits mature. If rollover rates for time deposits remain near 90 percent even after interest-rate cuts, it suggests that precautionary savings behavior remains deeply entrenched. Such behavior would indicate that lower interest rates alone are insufficient to stimulate consumption and that household confidence remains weak.
