China’s forgotten consumers

Opinion UnhedgedChina’s forgotten consumers Plus more on private credit and BDCsRobert ArmstrongAdd to myFTGet instant alerts for this topicManage your delivery channels hereRemove from myFT© BloombergChina’s forgotten consumers on x (opens in a new window)China’s forgotten consumers on facebook (opens in a new window)China’s forgotten consumers on linkedin (opens in a new window)China’s forgotten consumers on whatsapp (opens in a new window) Save China’s forgotten consumers on x (opens in a new window)China’s forgotten consumers on facebook (opens in a new window)China’s forgotten consumers on linkedin (opens in a new window)China’s forgotten consumers on whatsapp (opens in a new window) Save Hakyung Kim and Robert ArmstrongPublishedMarch 12 2026Jump to comments sectionPrint this pageUnlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. The February consumer price index inflation report landed yesterday. It was close enough to the January report that readers might usefully turn back to our letter about that one. Once you take out food and energy (too volatile to be indicators) and housing (old news) you see that goods inflation is quite low, but services inflation (and therefore total inflation) is still a notch or two above target and showing few signs of improving. Different weighting schemes mean that, on the Federal Reserve’s preferred methodology (personal consumption expenditures) inflation is likely even further above target. And if oil prices remain high, that will have second-order effects on various price categories and on inflation expectations. As many predicted, the last mile of inflation reduction is proving a challenge. Send us your thoughts: unhedged@ft.com.ChinaWe’ve neglected China recently, distracted by other things. But there’s a lot going on. Notably, the annual “two sessions” policy marathon is coming to a close. There’s was a big emphasis on economic objectives this year, with the release of a new five-year economic plan as the government struggles with slowing growth, the property bust, and deflation. The biggest headline has been China’s 4.5 per cent to 5 per cent GDP growth target for 2026, the lowest in 30 years. That is not as alarming as it sounds, given that growth came in at 5 per cent last year — it is a realistic, achievable target that “does not mean collapsing growth”, says Rory Green at TS Lombard. The real worries continue to be consumer demand and deflation. CPI inflation has been hovering around zero for three years: The GDP deflator, which measures price changes for domestic production, has been falling since 2023, the longest negative streak since China transitioned towards a market economy in the 1970s:China’s CPI target is 2 per cent this year, unchanged from 2025. The highest CPI peak in the past three years was last month’s 1.3 per cent rise, which looks like a one-off driven by lunar new year celebrations. Tianlei Huang at the Peterson Institute for International Economics says policymakers aren’t acting boldly enough to hit 2 per cent. He says:You don’t really see much changes on either policy priorities or just the scale of the macro priorities . . . What’s the point of having a target if you don’t aim to reach it?China’s deflation is driven by overcapacity, and is trapped in a feedback loop with weak consumer demand. It’s not a coincidence that the crash in the oversupplied property market and limp consumer demand have come at the same time. Nearly 70 per cent of household wealth is tied up in property. But the government’s work report does not contain any new measures which would draw a line under the property slump. Zichun Huang at Capital Economics says “the only way to make a turnaround in the housing market is to devote large-scale fiscal support to that sector. But their current measure is just basically to wait for supply and demand to come back into balance. That’ll take a long time.”It is puzzling that the government is not supporting consumption more aggressively. Huang at the Peterson Institute says he heard from one prominent Chinese economist that the government is confident that both the housing market and US-China relations are set to recover this year — and that the government remains more focused on investing in technological self-reliance than in boosting consumption. The chart below, courtesy of TS Lombard, shows the government might be looking towards a tech boom to create momentum:Counting on a US-China détente or a technology-driven positive supply shock sounds more like hope than strategy. Interest rate cuts might not help either. If the People’s Bank of China lowers rates further, that might both encourage more capital outflows (which had reached an all-time high in dollar terms last year) and worsen the industrial overcapacity problem. Without a realistic policy for boosting consumption, a lost decade of deflation looms. (Kim)A few more thoughts on BDCsSeveral readers wrote in to respond to yesterday’s note on private credit and Business Development Corporations. One important point readers emphasised, which I should have mentioned yesterday, is that one cannot attribute the fall in BDC share prices and valuations solely to worries about credit quality. It is important to remember that tightening credit spreads, and more recently a declining federal funds rate, have diminished BDC profitability and dividend capacity in recent years. One reader pointed me towards the Golob Capital BDC slide illustrating the point. Loan yields (blue line) are falling faster than cost of debt (mint line), compressing spreads (gold line):Another important point came from Will Moss at Absolute Strategy Research. He noted BDC share prices are responding in large part to what is happening in public bonds and loan markets — specifically for software loans. Both private credit in general and BDCs in particular are overweight tech and software, relative to public markets, with some estimates saying that as much as 17 per cent of PC loans are to the software industry. As software high-yield credit spreads have risen on fears of AI disruption, BDC valuations (price/net asset value) have fallen in tandem, as this ASR chart shows:At the same time, it is not surprising that private credit and BDC managers have not marked their tech loan values down as quickly as the market. Software company cash flows are probably still solid — AI worries are about what will happen, not what is happening. And the fund managers have every reason to convince themselves that their particular companies will be the ones that prove resilient in an AI shock.One good readOn getting older.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereThe AI Shift — John Burn-Murdoch and Sarah O’Connor dive into how AI is transforming the world of work. Sign up hereReuse this content (opens in new window) CommentsJump to comments section Follow the topics in this article Robert Armstrong Add to myFT Unhedged Add to myFT Global Economy Add to myFT Markets Add to myFT China Add to myFT Comments