China: Consumption bouncing back, but how strong?
- Anecdotal evidence of revenge spending abounds
- Restaurants and entertainment among the sectors poised to benefit
- Yet household preference for more savings is at a record high
- Sluggish employment and housing stress could impede a full recovery
A citywide lockdown slashed Shanghai’s consumption by 48.3%yoy in April, and investor anxiety sent stock prices of major luxury goods tumbling. Now, there’s optimism in the air as the city, which tops the country in per capita spending, sputters back to life. High-frequency mobility indicators show gradual revival in June. That raised hopes that the end of lockdown would unleash eight weeks of pent-up demand.
A rebound in consumption as normalcy returns is unsurprising. Underpinning this is a behavior termed “revenge spending”, particularly for spending on goods and services inaccessible during the outbreak as consumers indulge and overcompensate for their lockdown privations. The reopening of high-end malls in Shanghai of late saw lines snaking outside luxury brands. Restaurants and entertainment alike are also sectors poised to benefit from the retaliatory spending spree.
Brick-and-mortar stores aside, major e-commerce platforms have kicked off 618 mid-year shopping festival buoyed by record orders and deliveries. This alongside shopping vouchers as well as free digital yuan handed out by local governments will help spur a near term retail rebound from a nosedive in April.
How resilient that narrative against the backdrop of sluggish labor market remains to be seen. Jobless rate rose to 6.1% in April, the highest level since early 2020, while youth unemployment skyrocketed to 18.2%. Weakness was evidenced prior to the outbreak. Data from Zhaopin showed there was a mere 0.71 vacancy for each graduating job seeker in 1Q, the lowest since the record began in 2018.
Pressure will likely mount further as college graduates is projected to reach an all-time high of 10.76mn this year. Experience suggests that unemployment typically peaks in the several months after graduation. We reckon that, however, the lag could be longer this time around. China’s small and medium-sized enterprises -- generate 80% of employment -- are exceptionally exposed to the devastation caused by the pandemic. Plunging profits and sporadic lockdowns have undermined the willingness for SMEs to hire. Regulatory headwinds facing key industries such as after-school tutoring and big tech are an added constraint.
Falling home prices is another concern. Chinese household balance sheet is overwhelmingly concentrated in real estate and thereby more vulnerable to housing stress. At the end of 2019, the value of property held by households amounted to RMB232tn. That was about 40% of total household assets, almost twice the share for US households (24%). Given that mortgage debts are not adjusted for changes in home prices, household net worth shrank during the latest downturn.
Beijing’s sticking to its mantra that “houses are for living in, not for speculation” means the government is determined to prevent property prices from surging again, undermining a once near-guaranteed way for ordinary families to build wealth. Other impacts abound, including a decrease in transfer payments by local municipalities struggling to finance their budgets with lower land revenues.
Such negative wealth and income shocks suppress household spending. Precautionary savings are on the rise in tandem. According to the latest PBOC’s report, 54.7% of the surveyed respondents were more inclined to save in 1Q — the most on record.
All told, retail data will probably point to a sequential recovery in the next couple of months. Yet lingering uncertainty could impede a full recovery in consumer spending. Wuhan, which endured a 76-day lockdown in early 2020, only register YOY growth in retail sales a full year after its lockdown lifted.
To read the full report, click here to Download the PDF.
To unsubscribe, please clickhere.
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.