PDD Holdings' warning reveals a crisis in Chinese consumption and the economy.

The recent warning from PDD Holdings Inc., the parent company of Temu, has caused a significant stir in the financial and economic realms, marking a turning point in the perception of the health of the Chinese economy. During a results presentation, CEO Chen Lei made it clear that the company faces an uncertain future, with revenues and profits that will "inevitably" decline due to the slowdown in economic growth. This grim forecast has surprised investors, as PDD had been considered one of the last bastions of growth in a crisis-hit market. PDD's results were worse than expected, and its stock plummeted by 29%, equivalent to a loss of over $55 billion in market value. This collapse not only affected the company but also dragged down its closest competitors, Alibaba and JD.com, which saw their shares fall by around 4% in Hong Kong. This scenario reflects a drastic change in consumption in China, where demand, even for low-cost products, has weakened considerably. PDD's low-price strategy, which had been fundamental to its success in the market, now faces new challenges. Chen mentioned that the company is experiencing "new challenges ahead" due to changes in consumer demand and increasing competition. This is particularly alarming for analysts, who see a clear indication that consumption, a key driver of the Chinese economy, is slowing down amid job cuts and wage reductions. The situation is further complicated by the recent decision of Din Tai Fung, a famous fast-food chain, to close more than a dozen establishments. Similarly, Starbucks announced a 14% decline in its revenues for the June quarter in China. These signs point to a broader pattern of weakening consumption affecting multiple sectors of the economy. The consumption growth figures are alarming: retail sales grew by only 3% in the first seven months of 2024, a significant drop from the 8% growth recorded before the pandemic. A survey by the central bank revealed that confidence in future incomes has fallen to its lowest level since late 2022, and nearly half of the respondents consider employment to be "bleak and difficult." This situation has led many consumers to opt to save more, indicating greater caution in their spending. In this context, PDD's response has been to seek adaptation to the new consumer realities. Chen indicated that there is a fundamental shift in buyer behavior, with consumers now prioritizing quality and value over price, which has led the company to collaborate with brands and manufacturers to create customized products. Meanwhile, investors are divided on how to interpret the signals. Some believe that PDD's warnings are an attempt to manage expectations following a period of extraordinary growth. Despite the decline, there are those who think that the company could outperform its competitors in a challenging economic environment, although this will largely depend on the evolution of the labor market and the economic policies implemented by Beijing. The Chinese government has tried to stabilize the labor market by encouraging state-owned enterprises to increase hiring and training. However, many economists have pointed out that the lack of direct measures to support consumers, such as cash subsidies, could further exacerbate the situation. The combination of a stricter regulatory environment and stagnant wage growth has raised concerns about the recovery of consumption. Looking ahead, the situation presented by PDD reveals that the Chinese economy is at a crossroads. The decline in consumption and increasing competition are signs that the path to recovery will be complicated. Analysts suggest that PDD must be able to adapt and provide real value to consumers, as the way forward depends not only on low prices but also on understanding and meeting the changing demands of a transforming market. The outcome of this crisis could serve as a wake-up call for the entire e-commerce industry in China and a warning about the fragility of a system built on consumption. The health of the Chinese economy may depend on how companies and the government respond to these challenges in the coming months.