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Thursday, Feb 25, 2021

China’s economic outlook fuzzy as analysts say spending habits have changed

China’s economic outlook fuzzy as analysts say spending habits have changed

Recovery in Chinese consumer spending remains weak and has been led mainly by high-end consumption, begging the question – is pent-up demand by shopping-deprived consumers driving demand, and is it sustainable?

When Vivian Li walked into a popular hotpot restaurant in downtown Beijing last week, it was the first time she had dined out in two months.

Li, in her early 30s, has reined in her budget since quitting her job in the film industry in July. She had hoped to find a new job within three months, but that plan hasn’t panned out. So, she has been cutting costs by relying on public transport, purchasing discounted food via group-buying apps, and cooking just two meals a day at home.

Unemployment has not stopped Li from indulging in cosmetics, but it has prompted her to turn to lower-priced domestic brands. “I still have savings; it’s not the end of the world,” she said.

In similar fashion, a food-delivery driver surnamed Cai just bought a new car last month in Henan province, but he had to keep working in Beijing during this month’s “golden week” holiday period to ensure that he had enough money to make the payments.

As China’s economy rebounds from the doldrums of the coronavirus pandemic, its 1.4 billion consumers are increasingly showing their willingness to spend again on certain goods and services. And Chinese leaders are counting on a big uptick in domestic consumption to help drive economic development while resisting external pressure amid tensions with the United States in a post-coronavirus world.

In September, a significant increase in the sales of cars, cosmetics and jewellery – all discretionary spending items – helped retail sales of goods grow by 0.9 per cent in the third quarter, marking the first quarterly rise this year and contributing to an acceleration in the nation’s overall economic growth rate of 4.9 per cent in the July-September period, year on year.

Still, the recovery in Chinese consumer spending remains weak and uneven, mainly led by high-end consumption, raising questions about the extent to which “revenge spending” – the result of pent-up demand for purchases by shopping-deprived consumers – is responsible for the recent improvement.

Additionally, there have been structural challenges to the economy, such as a decline in household income, the widening wealth gap and mounting debt burdens, creating uncertainty about whether consumer spending will continue at the same pace in the fourth quarter.

Xu Hongcai, deputy director of the economic policy commission under the China Association of Policy Science, said the consumer sector will have to play “a fundamental role” in a more rapid economic recovery.

“China has such a large population. Once people restart various activities, consumption will rise,” Xu said, adding that the push to develop coronavirus vaccines is creating a more positive economic outlook than was seen in China months ago.

Boosted by stronger consumer confidence, heavy discounts and the appeal of new-energy vehicles, the value of auto sales – the largest component of overall goods sales – rose 11.2 per cent in September from a year earlier, the fifth straight month of double-digit growth, according to figures from the National Bureau of Statistics (NBS).

Sales of cosmetics and jewellery also climbed 13.7 per cent and 13.1 per cent, respectively, in September, compared with a year prior. And purchases of alcohol and tobacco also rebounded vigorously last month, respectively jumping 22 per cent and 17.6 per cent.

Online sales, which received a major boost during coronavirus lockdowns, continued to thrive, increasing 15.3 per cent in the first three quarters of the year – a full percentage point more than during the first half, and significantly faster than the pace of overall retail sales growth.

All of the above boosted the growth rate in retail sales to 2.4 per cent in September from a year earlier after adjusting for inflation – the first monthly growth seen this year. Final consumption expenditures – a combination of spending on goods and services – contributed 1.7 percentage points to China’s 4.9 per cent gross domestic product (GDP) growth rate in the third quarter, the NBS said on Monday.

That was a sharp reversal of consumption’s 2.3-percentage-point drag on growth in the second quarter.

The trend of strong consumer spending appears to have continued into the fourth quarter, thanks largely to the eight-day National Day and Mid-Autumn Festival holiday period in early October. However, the recovery in spending has not been even, with purchases of high-end products significantly outpacing those of moderately priced brands.

Unit sales of luxury cars surged 33 per cent in September from a year earlier, according to the China Passenger Car Association. That figure far outpaced the meagre 1 per cent increase in unit sales of lower-priced domestic brands, pulling the overall unit-sales growth rate down to 7.3 per cent.

The sharp rise in alcohol sales was also led by high-end brands. The retail price of a top-of-the-line Mao-tai brand baijiu – a widely popular spirit with alcohol content as high as 60 per cent – rose to 3,099 yuan (US$466) a bottle in September from 2,400 yuan a year earlier, according to a report by Chinese media.

“The economic recovery might have benefited low-income groups more in the third quarter,” said Zhang Yu, chief analyst at Huachuang Securities, in a note on Tuesday. “Pent-up demand for weddings and hometown visits may be related to the sharp rise in tobacco and alcohol spending.”

The uneven consumer-spending picture was also evident from a geographical perspective. Retail sales in Shanghai, the coastal financial and economic centre of China, rose by 11.5 per cent in August, while sales in the province of Jilin, in the country’s northeastern rust-belt, dropped 8.7 per cent, according to government figures.

Meanwhile, other sectors of China’s consumer market have been slow to rebound, despite the broader recovery.

The income of catering companies, for instance, fell 2.9 per cent in September from a year earlier, after declining a cumulative 23.9 per cent in the first nine months of the year, NBS data shows.

And sales of communication devices in China dropped by 4.6 per cent last month, year on year. “That might be related to some smartphone companies having delayed their launch of new models,” NBS spokeswoman Liu Aihua said on Monday, alluding to decisions by Apple and Huawei.

“Although [retail sales] are showing a recovery trend, the overall level is still low and still has a ways to go to return to normalcy,” she said.

In a commercial area near the Foxconn factory at Zhengzhou, Henan province, where production lines are running around the clock to produce Apple’s new iPhone 12, a restaurant owner surnamed Chen said he has seen more workers in the past couple of months, but they have been spending less compared with last year.

“It may be due to the pandemic – people’s consumption habits have changed, and they have decided to save more money,” he said.

Despite improving in September, retail sales in the first three quarters of the year were down 7.3 per cent from a year earlier, and consumption dragged down the nation’s overall economic growth rate by 2.5 percentage points during that period.

Zhang of Huachuang Securities also said the latest consumer figures out of China had sounded an alarm because they showed that the ratio of per capita consumption spending to per capita income did not continue rising in the third quarter.

The consumption tendency of urban citizens in the third quarter was 60.6 per cent, lower than 64.3 per cent a year prior and only slightly higher than the 60.3 per cent rate in the second quarter. And in rural areas, the consumption tendency of consumers dropped to 76.2 per cent from 83.9 per cent in the second quarter, and from 79.2 per cent a year prior, according to calculations by the Post based on NBS data.

“That might restrict the upper limit of the consumption recovery in the fourth quarter,” Zhang warned.


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