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China is likely to fall short of its 5.5% GDP target after the country reported a meagre 0.4% GDP growth during the quarter ended June 2022, its slowest pace of growth since 2020. Beijing is trying to emerge from the economic slowdown caused by the Covid-19 lockdown, but weak China consumption is among the several factors hindering this effort.
The world’s second-biggest economy is shifting to a consumer-led economy as wages increase. However, the overall private spending in context to the GDP is low by international standards, says Ernst & Young in a report. The household savings rate in China is among the highest in the world, and while there are several cultural and social explanations for this phenomenon, Shang-Jin Wei, a professor at Columbia Business School writes that a poor sex ratio might also be a contributor.
Why is China consumption weak?
For the month of June, retail sales rose by 3.1%, recovering from the contraction seen in the previous months. Consumer spending was focused on autos, cosmetics and medicines, says data from the National Bureau of Statistics. However, catering, furniture and construction materials saw a decline. Retail sales are a good measure of household consumption, but we also need to look at the broader China consumption story.
Based on the research by Ernst & Young, food and residential are the top spends of Chinese citizens, while spending on education & entertainment, transport & communication, healthcare, and clothing is yet to fully take off. The audit firm says China is the petri dish for global consumer brands, thanks to the country’s wide set of consumers, rising e-commerce, digital payments, and supply chain reinventions, among other things.
While most fundamentals seem positive, why are we saying that China’s consumption is weak?
Beijing’s strict zero-Covid policy has been the biggest hurdle for growth in GDP and consumer spending. Back in May 2022, China’s retail sales contracted almost 7%, better than the figure seen in April when retail sales were down 9.7%. This implies that the 3.1% increase in retail sales for June comes after the country reopened from a severe bout of the pandemic. It is likely that the pent-up demand drove up retail sales, but it remains to be seen if there is a sustained uptick in the country’s consumption figures.
As per research data compiled by Bloomberg from G7 Connect, TS Lombard and Variflight, passenger trips in China were lower this year than in June 2021, whereas domestic flights for the quarter were down 62% compared to last year. Separately, the movement of trucks was weak and 20% fewer trucks were plying the roads.
Several of these reductions were due to the lockdowns imposed in China, which severely curtailed movement and economic activity, and created supply chain issues while putting financial pressure on factories which were forced to shut. While the condition has improved in June, there is a possibility of further lockdown if fresh Covid-19 cases are detected. Earlier this week, several Chinese cities again adopted Covid-19 curbs as fresh cases were detected and mass testing was launched in Shanghai.
Where is China lacking?
Declining consumption in China is reflected in the economic data coming out of the country. Earlier this week apex body China Association of Automobile Manufacturers cut its 2022 vehicle sales forecast to 3% growth, down from the 5.4% growth it previously predicted. The association expects a 16% fall in the sales of commercial vehicles in 2022.
The auto sector in China has been severely affected by the Covid-19 lockdown as production lines remained shut, especially in industrial hub Shanghai. To revive demand, China cut the purchase tax to 5% on cars priced at less than 300,000 yuan (~$45,000). On the other hand, China is trying to boost sales of electric vehicles by offering incentives and subsidies to customers. New energy vehicle (NEV) sales for the month of June rose more than 100% on the back of favourable policies, but the auto association sees chip shortages and rising raw material costs weighing on the auto industry.
Since March 2022, production and export activities in China had slowed down as the country was facing a new wave of Covid-19. However, exports picked up in June after the economy started to reopen.
“The global context will also weigh on China’s outlook in 2022, by sharply reducing export growth and dampening confidence amid heightened geopolitical tensions,” says World Bank in a report. A potential recession in the US and a global slowdown are likely to weigh on the export figures of China.
The real estate sector in China has been under pressure for the past couple of quarters with several developers defaulting on loans. A report by Beike Research Institute expects overall property demand to decline 17% from 2021 through 2025, compared to the previous five years. The country’s 100 biggest real estate developers saw new home sales slide 43% in June compared to the previous year.
China has tried to support the real estate sector by easing buying curbs. However, disruptions across the board have delayed several projects even as developers deal with high debt and potential defaults. A recent report from China said that homebuyers across 22 cities had refused to pay mortgages as developers were delaying the construction of the projects. The unravelling of the real estate sector is negatively impacting the liquidity of several banks in the country.
Meanwhile, China is also facing a unique problem of youth unemployment, which could potentially cripple the economy going forward. Nearly 20% of youth in China were unemployed as of June 2022, and the figure is expected to rise as a fresh batch of graduates starts seeking jobs.
Back in May, when the country reported deplorable retail sales figures, Chinese cities started handing out consumption vouchers to stimulate consumer spending. Publicly available data showed that China had issued some 5 bn yuan ($750 m) worth of these consumption coupons. To promote the recovery of travel and tourism, some regions were handing out travel vouchers.
“Fiscal stimulus will continue to do the heavy lifting before consumption demand fully recovers. Local governments have completed the issuance of CNY 3.4 tn ($503 bn) special bonds before the end of June,” said Chaoping Zhu, Shanghai-based Global Market Strategist at JP Morgan Asset Management.
