China’s post-pandemic recovery has been heavily reliant on one force - consumption. This is in stark contrast to the “troika” of China’s traditional growth drivers, namely consumption, investment and exports that transformed the country into the world’s second largest economy. The recent Labour Day “golden week” holidays brought the role of consumption to the fore since it was the first major long holiday after mainland China removed pandemic restrictions. Gauging the magnitude and sustainability of this domestic consumption recovery would be critical for assessing China’s medium-term growth prospects.
In the first quarter of the year (Q1), China’s retail sales soared almost 11% year over year, contributing the most to Q1 GDP growth of 4.5%. The surge in consumption offset softer fixed asset investment, which was dragged by negative growth in private investment and property construction. Meanwhile, weakening momentum in new orders due to the banking turmoil and monetary tightening in the US and Europe was the main culprit behind weaker exports and a plunge in manufacturing sector business confidence indicators (PMIs) to contractionary territory. The divergence between consumption and industrial activity underlines the importance of domestic demand in bolstering China’s growth this year.
What is the Golden Week trend telling us?
The long May Day weekend did not disappoint. Domestic travel hit record highs in terms of single-day rail ticket sales, the number of trains operating, and tourist site ticket sales, among other metrics. According to the Ministry of Culture and Tourism, 274 million people travelled during the five-day holiday, representing an impressive 19% increment compared with 2019.
It is arguably less clear if the tourism boom translated into equally robust consumption growth. Despite the record high number of travellers, May Day weekend tourism revenue rebounded 31% from a year ago to RMB148 billion daily, and only recovered to levels comparable to, not above, pre-pandemic times. There is some evidence of consumers “trading down” as seen in the “military travel style” that has gained popularity among the youths. Many young consumers, worried over persistently high unemployment of close to 20%, travelled with the intent of spending the least money, while getting the most out of their trips, going as far as sleeping on trains or crashing at hotpot restaurants.
Is the consumption recovery sustainable?
There is the inevitable concern that near-term consumer spending has been mainly buoyed by the gradual release of pent-up demand. Amid muted sentiment, slowing household income growth and high unemployment, many call into question the sustainability of China’s consumption growth.
This concern is aligned with the pro-growth tone at the Politburo meeting on April 28. While the top leadership has seen the progress in the economy since the re-opening, they also recognised the lack of strength in endogenous growth drivers and insufficiency of domestic demand. Stabilizing employment and reviving sentiment are thus going to be critical for sustaining consumption and investment spending. To restore confidence of the private sector, the government advocates the removal of legal and regulatory barriers to enhance fair competition.
The areas of strategic focus include generative Artificial Intelligence and technological self-sufficiency. To get there, the leadership reiterated support for platform companies, fostering an environment for the Internet giants to expand and innovate. This is vital as the platform enterprises are key magnets for attracting young entrepreneurial talent. In addition, China placed a greater emphasis on opening up further to foreign investment and asked the state-owned enterprises to ramp up hiring and drive industrial upgrade. All this should help ameliorate the income outlook, thereby sustaining durability of consumption.
Given the uneven recovery thus far, the next leg of consumption growth will likely come from policy support and the resulting improvement in corporate and consumer sentiment. Policy support, in our view, will be measured and targeted towards areas of weakness. During the May Day long weekend, major retailers registered close to 20% growth in retail sales. Delving deeper into the mix, we see that services still led the recovery, as restaurant services headed the pack, up 58% year over year.
Meanwhile, property-related spending and clothing remained lacklustre. Retail sales growth of big-ticket home appliances came in below average. Supportive policies were recently launched by specific cities, such as consumption vouchers issued by Beijing to boost demand for smart home appliances. Shenzhen also scrapped property price guidance to facilitate mortgage applications. With these measures, we expect consumer goods sales to gain further traction into the year as the policy benefits come through.
Chinese authorities’ concern about the sustainability of this recovery is good news, dispelling market fears about any imminent reversal of policy stance towards tightening. In light of the solid consumption and pro-growth stance of the Politburo, we have high conviction in our Overweight view on China equities vs Asia ex-Japan and globally, and our tilt towards the growth sectors in China, including consumer discretionary, communications services, technology, and industrials. Last but not least, China’s accommodative monetary policy stance provides a conducive backdrop for the largely Investment Grade Asia USD-denominated corporate bonds, as bond yields are likely to remain compressed this year, with risk to the downside, auguring well for bond prices.
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