How are government subsidies and emotional spending creating new opportunities for Chinese retailers?

China's economic landscape continues to evolve, with retail sales data providing fresh insights into consumer behaviour and market dynamics. The latest figures reveal a complex picture of growth amid ongoing challenges, driven by government intervention and new consumption patterns among younger demographics reshaping traditional retail sectors.

Understanding these trends is essential for investors looking to capitalise on opportunities in Chinese markets. The retail sector's performance often serves as a barometer for broader economic health and market sentiment.

China retail sales exceed expectations in May

China's retail sales delivered a pleasant surprise in May, growing 6.4% year-on-year (YoY) despite market expectations of a slowdown. This growth comes against a backdrop of domestic deflationary pressures and ongoing international trade tensions.

The acceleration was particularly pronounced among larger enterprises, which recorded an impressive 8.0% growth rate. This suggests that established retailers are better positioned to navigate current market conditions than their smaller counterparts.

Retail sales data often reflects broader economic sentiment, making this positive reading encouraging for policymakers. However, questions remain about the sustainability of this growth momentum as the May sales volume includes front-loading effect from the '618' online shopping festival. Other indicators such as the sharp decline in purchasing managers' index (PMI), worsening home prices and lingering worries on the labour market pose challenges.

Figure 1: China's retail sales accelerates but structural issue with housing prices remain unresolved

Government subsidies drive consumption growth

The central government allocated RMB 300 billion from ultra-long-term government bond proceeds to support a comprehensive consumer goods upgrade programme. This initiative covers cars, home appliances, electronics, and home renovations. The subsidy programme has proven effective at rapidly influencing consumer behaviour and market dynamics across targeted sectors since its launch in 2024.

Car owners trading in old vehicles can receive subsidies of up to RMB 20,000 for new electric vehicles (EV) or RMB 15,000 for new internal combustion engine (ICE) vehicles. This programme has significantly boosted automobile sales, with new EV sales reaching 4.4 million units this year.

The EV market now commands over 50% of new vehicle sales, representing a 33% YoY growth. This shift towards electric mobility reflects both government policy support and changing consumer preferences.

Electronics and home appliances emerged as the standout performers in May's retail data. Household appliances and audio-video equipment sales surged 53.0% YoY, while telecommunication equipment sales jumped 33.0%.

The electronics subsidy programme offers up to 20% discounts on home appliances, capped at RMB 2000 per item. This covers 12 categories including refrigerators, washing machines, televisions, and air conditioners. Mobile phones, tablets, and smartwatches under RMB 6000 qualify for subsidies of up to 15% of retail price, capped at RMB 500 per item. Crucially, these electronics don't require trade-ins, making them accessible to more consumers.

Emerging consumer trends reshape retail landscape

While sentiment for big-ticket items like houses remains poor, a new 'emotional spending' pattern is powering growth in China's retail sector. Consumers are shifting focus from essential goods to products and services providing emotional fulfilment, particularly among younger generations. These include toys, live performance, bubble tea and travel experiences.

Pop Mart exemplifies this trend perfectly. Founded in 2010, the company designs collectible toy figures packaged in 'blind boxes', adding surprise elements to the shopping experience. The company works with designers and collaborates with well-known brands worldwide to create unique intellectual property (IP) characters.

These collectible toys became extremely popular globally after celebrities like Rihanna and BlackPink's Lisa were photographed carrying them. A limited-edition human-sized Labubu figure recently sold for RMB 1.08 million at a Beijing auction, demonstrating the premium consumers will pay. The company's share price has tripled since its 2020 Hong Kong listing, reflecting investor enthusiasm for this new consumption model.

The bubble tea industry has also experienced remarkable growth, with chains like MiXue raising close to $1.4 billion from IPOs this year. This demonstrates how lifestyle brands can capture significant market value. These beverage companies have capitalised on changing consumer preferences, particularly among younger demographics who view bubble tea as both refreshment and social experience.

Share price analysis reveals trading opportunities

Pop Mart's share price has surged 183% year-to-date. Despite trading at a forward price-to-earnings ratio of 42 times, sell-side analysts largely justify these valuations through projected revenue growth of nearly 80% driven by new products and global expansion.

The technical chart shows a clear uptrend with the share price trading well above the technically significant 200-day simple moving average. This positioning above 200-day simple moving average suggests underlying strength in the stock's momentum. With the stock trading at the lower bound of the uptrend channel, there's possibility for it to revert to the centreline at $277. If significant catalysts emerge, the price could even test the top of the channel at $300. Based on recent closing prices, the stock is trading at around 9% discount to its all-time high of HK$283.4.

Figure 2: Pop Mart daily price chart

Since listing in March 2025, MiXue's share price has increased by 154%, reflecting strong investor appetite for bubble tea brands. However, analyst opinions remain divided on the company's prospects. Two out of twelve sell-side analysts assigned sell ratings on LSEG due to fierce competition in the beverage industry. The average target price of $564.7 represents an 8% premium to the closing price on 17 June.

The technical chart reveals a clear uptrend with share prices trading at the channel's bottom. The relative strength index (RSI) below 50 suggests healthy technical valuation, potentially supporting a bounce to $560.

Figure 3: Mixue 4-hour price chart