China: Consumption bouncing back, but how strong?

The end of lockdown would unleash eight weeks of pent-up demand.
Group Research, Nathan Chow14 Jun 2022
  • 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
Photo credit:AFP

Revenge spending

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.

Growing unemployment

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.

Housing woes

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.

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Nathan Chow 周洪禮

Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港


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