Contrary to reports of a “consumption downgrade” in China, innovation is driving sales growth in consumer categories, including FMCG, according to local observers.

The recent financial results of companies like Masterkong Holding, a maker of instant noodles – half year sales up 8.5%, profits up 87% – might indicate that consumers are tightening their belts and buying more cheap fast foods.

But Zhao Ping, director of research at the Academy of China Council for the Promotion of International Trade, sees things differently. “FMCG sales growth came from innovative versions of existing products,” he told China Daily.

“It’s not as if consumers are shifting from top-end items to mid-range or low-end categories,” he maintained. “For example, sales of instant noodles slowed in the past years. So, some companies invested in innovation and revitalised their product portfolio.

“They launched high-end versions to meet consumers’ needs. That should explain why high-end instant noodles saw faster growth, while sales of low-end versions didn’t grow as fast.”

Last week’s China Brand Relevance Index from Prophet also suggested that innovation, rather than price and value, is fuelling the growth of domestic Chinese brands at the expense of international ones.

The Economist Intelligence Unit, meanwhile, has described discussion of a “downgrade” in local consumption as overdone, but it also said that “there is strong evidence that consumption activity has slowed quite sharply” – adding that this slowing is in large part related to issues around the property market.

Rapidly rising house prices in urban areas have increased household debt levels and adversely affected the spending habits of middle income consumers more than the most wealthy or lower income groups, the EIU said.

“This might explain the declining business fortunes of, an e-commerce firm known for its quality assurances and speed of delivery in big cities, and the rise of Pinduoduo, a rival firm that offers cheaper products to a broader demographic.”

Zhao, however, insisted that “the current macroeconomic environment supports consumption upgrade”, pointing to how the rise in China’s per-capita income over the past decade has kept pace with GDP growth rate, “boosting people’s purchasing power”.

Sourced from China Daily, EIU; additional content by WARC staff