The capitulation of the Chinese consumer threatens to drag stock markets around the world into a death spiral as one of the pillars of global growth is undermined.

Figures from the world’s largest consumer goods groups last week laid bare the shocking weakness of consumer demand in China, which threatens to pull down global stock markets that have been priced to perfection by more than five years of extraordinary monetary policy and asset price inflation.

For China to avoid a hard landing it was essential for consumer spending to pick up from where centrally planned infrastructure spending left off, but there are signs this simply isn’t happening. Unilever, the world’s third largest consumer goods company, said they were surprised by the “unusually rapid” slowdown in Chinese consumer demand.

The company said that sales growth had slumped to about 2pc during the nine months ended September, down from about 8pc growth last year. The slowdown in Chinese sales growth to about 2pc is also an average – there are pockets where trading is far worse. The company added that sales to the big hypermarkets in the country are less than 2pc or even negative in some cases.

Nestle, the worlds largest food company, recently reported falling sales for the first nine months of the year and also warned of “challenging” Chinese trading conditions. The fear of China going backwards is now becoming a reality, as the Chinese consumer is not picking up from where capital investment left off.

Immediately after the 2008 banking crisis China launched the largest stimulus package and infrastructure investment program the world has ever seen. China has used 6.6 gigatons of cement in the last three years compared to 4.5 gigatons the USA has used in 100 years.

The stimulus package increased fixed capital investment to 50pc of GDP, while domestic consumption withered to only 35pc. The lopsided economy led Hu Jintao, the President of China until 2012, to call the period of growth “unstable, unbalanced, uncoordinated and unsustainable.” The hope was it would eventually kick start consumer spending.

Those hopes have been shattered by the bursting of the Chinese housing bubble that is having a devastating impact on consumer confidence. Chinese house prices in September have fallen for the fifth month in a row and wiped out all the gains of the past year, according to National Bureau of Statistics (NBS) data last week.

House prices across 70 major Chinese cities declined by 1.3pc in September from a year earlier. The housing correction is widespread with prices falling month-on-month in a record 69 out of 70 major cities, up from 68 in August, according to NBS data. This will have wide ranging effects on the Chinese economy as according to French bank Societe Generale: “the aggregate exposure of China’s financial system to the property market is likely to be as much as 80pc of GDP.”

David Fuller's view

Here is a PDF version of John Ficenec's article for The Telegraph.

This is obviously a concern for the multinational companies mentioned above, which have seen a sharp drop in their China sales this year.  The article above says this is due to declining consumer demand due to softer property prices.  It may also be due to another even more important factor, which I have discussed in reply to the email above.