China: How far can consumption drive the economy?
- GDP growth edged down from 6.2% YoY in 2Q to 6.0% in 3Q, the slowest since 1Q92
- Consumption revived in September thanks to policy supports, but the bounce doesn’t look sustainable
- Tepid private investment and contracting export growth heighten risks for sub-6% growth
- Additional public spending is warranted
- A further loosening of both monetary and fiscal policy may put a floor under growth by mid-2020
There were some positive signs. Growth in industrial production picked up from 4.4% in August to 5.8% in September. The jump came despite shrinking export growth (Sep: -3.2%). Stronger consumer spending helped, with retail sales bouncing from 7.5% to 7.8%. Policy supports were at play. The State Council announced 20 measures in August to boost consumption, from encouraging night markets to improving commercial pedestrian streets.
Spurring consumption is crucial. But subdued wage growth casts doubt on the sustainability of the latest rebound, in our view. Real growth in disposable income, a leading indicator of consumption, fell further to 6.1% from as high as 8% in 2015. And the persistent gap between growth in income and expenditure points to a decline in consumer optimism. Several factors are behind this.
Ongoing trade tussle with the US have tempered hiring in export industries. The “phase one” trade deal reached last week was encouraging. Though two thirds of China’s exports to the US (~USD360bn) are still subject to punitive tariffs between 15%-25%.
Businesses are grappling with shrinking foreign orders and soaring domestic costs. Weak money growth and strained credit suggest reluctance of enterprises to invest, let alone hiring. PMI’s employment index hovered around 47 in 3Q, the lowest since February 2009. Ratio of vacancies to jobseekers dropped to the lowest level in four years. Employment has fallen even in once-booming sectors such as the internet and online game start-ups.
Strong property prices is another concern. Average prices of new homes rose for 52nd straight month in August. A multi-year housing boom has left households with overstretched balance sheets. Household debt to disposable income has soared from 91% in 2013 to 139% at end-2018, higher than that in the US, Japan, and France. Financial constraint has been compounded by a collapse in peer-to-peer lending platforms and falling returns on wealth management products. We expect household spending to become more conservative, dampening growth on discretionary sectors from automobiles to smartphones.
Spending on education, medical, and culture & entertainment stayed healthy. The resilience of the tertiary sector was reflected by the service business activities index, which remained well in expansion thus far. Particularly for those in lower tier cities and the countryside, where cost of living is less expensive. Per capita disposable income and expenditure for these groups are growing faster than their urban counterparts. Even so, this is not sufficient to offset the deceleration of overall consumption.
Weak consumption, together with tepid private investment and contracting exports, raises the spectre of sub-6% GDP expansion. Additional public spending is warranted to shore up growth. Local governments issued RMB3.04tn of new bonds from January September, collectively using up 98.6% of their new debt quota.
Early assessment on how much debt needs to be issued next year is already in progress. Part of the quota will be allocated in advance to ensure funding availability at the beginning of 2020. This should lend some support to infrastructure investment such as metro lines and waterscape park in the months ahead. In a bid to supply liquidity, the PBoC is expected to lower banks’ required reserve ratio by another 50-100bps in 4Q. We also see the authority guiding the one-year loan prime rate down gradually. A further loosening of both monetary and fiscal policy may put a floor under growth by mid-2020.
To read the full report, click here to Download the PDF.
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group 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. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, 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 Group 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 Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.