Price wars grip China as deflation deepens, $30 for a luxury Coach bag?

"I'm cutting down on large expenditures," said 28-year-old Li, while browsing for items in Beijing's Super Zhuanzhuan second-hand luxury items store that opened in May.

"The economy is definitely in a downturn," she said, adding: "My family's wealth has shrunk by a lot" due to the property crisis China has been grappling with since 2021.

As deflationary pressures mount in the world's second-largest economy, consumer behaviour is changing in ways that could lead to further downward pressure on prices, raising concerns that deflation could become entrenched, posing more headaches for China's policymakers.

Data showed on Monday that consumer prices fell 0.1% in May from a year earlier, with price wars raging in a number of sectors, from autos to e-commerce to coffee amid concerns about oversupply and sluggish household demand.

"We still think persistent overcapacity will keep China in deflation both this year and next," Capital Economics said in a research note.

New businesses are seeking success by targeting penny-pinchers, from restaurants selling 3 yuan ($0.40) breakfast menus to supermarkets offering flash sales four times a day. But this trend is worrying economists who see price wars as ultimately unsustainable as losing firms may have to close and people may lose their jobs, fuelling further deflation.

Consumer price sensitivities' have accelerated growth in the Chinese second-hand luxury market since the pandemic, with annual growth rates surpassing 20% in 2023, according to an industry report by Zhiyan Consulting from last year.

But that growth has also led to a spike in the volumes of such items available for sale - which is noticeable in the level of discounts on offer.

Some new stores, including Super Zhuanzhuan, are offering items at discounts of up to 90% of their original price, compared with industry standards of 30-40% in recent years. Discounts of 70% or more are also now common on large second-hand platforms, such as Xianyu, Feiyu, Ponhu and Plum.

"In the current economic environment we are seeing more existing luxury consumers shifting to the second-hand market," said Lisa Zhang, an expert with Daxue Consulting, a market research and strategy firm focusing on China.

But sellers "have more discounts and it's due to more competition."

At Super Zhuanzhuan, a green, carryall Christie handbag model by Coach, which its first owner bought for 3,260 yuan ($454) can be re-purchased for 219 yuan ($30). A 2,200 yuan Givenchy G Cube necklace can be found for 187 yuan.

"Year-to-year, it's like 20% growth in the number of sellers, but the buyers' numbers are pretty much stable," said the founder of another second-hand luxury business in China, asking for anonymity to speak candidly about the state of the industry.

"The middle class - their salary has really decreased. The economy is the number one reason we're seeing these trends."

He said big cities such as Shanghai and Beijing have enough buyers to accommodate new market entrants, but elsewhere in China there isn't any room for more.

"I would expect the majority of the stores which have recently opened up will actually close," he said.

University professor Riley Chang was browsing through Super Zhuanzhuan not because she wanted to buy anything new - she hasn't spent money on big brands since the pandemic - but because she wanted to see what the market was if she sold any of her own possessions.

She wasn't happy with what she saw.

"I've been to several major second-hand luxury stores in Beijing and Shanghai and they all try to push your price as low as possible," said Chang.