Insights on China's new policies, reform initiatives and economic data brought to you from Lead Analyst Jens Presthus
23 June 2022
In a digital event last week Jens Presthus, Associate Director at Global Counsel, was joined by Alicia García-Herrero, Senior Fellow at Bruegel and Chief Economist for the Asia-Pacific at Natixis, to discuss the future of Chinese economic and foreign policy. Click here or below to watch the conversation.
The Chinese consumer does not believe that the worst is over, prioritising food and energy over cars and smartphones.
Local governments are running out of firepower while the PBoC is saving ammunition. Governor Yi Gang knows confidence and demand needs to improve for policy support to be effective.
President Xi Jinping said on June 23rd that China will meet its economic targets for the year. But with zero covid in place, 2-3% GDP growth is perhaps more plausible than 5.5%.
Spending like its 2019
Retail sales in RMB indexed, under 100 = below May 2019 levels
Source: NBS
The concerned consumer
The Chinese consumer is more pessimistic than ever, and it shows. Retail sales in May were only 1.8% higher than in May 2019, with demand particularly weak in Shanghai and Beijing partly due to movement restrictions. But provinces without the same severity of restrictions, including Hubei, also saw a drop of almost 7% from the same period in 2019. Beijing’s zero covid policy is therefore not solely to blame. Showing growing concern about future prospects, households have continued to reduce spending on non-essential items and durable goods, such as electronics and cars – which in May declined 9.3% and 13.6% from the same time last year. Furniture spending was also 20% lower than in May 2019, underscoring weakness in the property sector. Conversely, purchases of food and energy products jumped, with the former registering a 13.4% increase from May 2021. For the second month in a row, the two categories were the only ones to witness year-on-year growth.
Stocking up on food and fuel
Retail sales by category, yoy % growth
Source: NBS
Zero covid, housing and unemployment market uncertainties will continue to keep a lid on domestic demand. The consumer confidence reading for April was the lowest on record since NBS started tracking the data in 1990. Rarely does it dip below 100 and into pessimistic territory – not even during the GFC did this happen. Beijing’s zero covid policy and attempts at private sector reform – including of the housing market – are largely to blame. Households are saving rather than spending – being concerned about job prospects and the safety of their life savings that often is stored in real estate. The official unemployment rate is now close to where it was in March 2020 – when unofficial estimates put it at 20% rather than just over 6% - while youth unemployment has hit a record high of almost 20%. To stop the latter from rising even further, some universities – with the ministry of education’s backing – are now requiring students to provide proof of employment before they are allowed to graduate. No job means no graduation and therefore no unemployment.
The least confident consumer
Consumer confidence index, below 100 = pessimistic outlook
Source: NBS
The PBoC is saving firepower as households and businesses are more interested in putting money into the bank rather than borrowing from it. Despite the weak retail sales data, the PBoC decided to keep its medium-term lending facility untouched at 2.85% on June 15th. The central bank’s governor, Yi Gang, knows monetary policy easing will be ineffective in this low-demand, low-confidence environment. Premier Li Keqiang also stressed on June 21st the need to control inflation and “leave room for monetary policy in response to new challenges”, acknowledging that there may be more pain ahead. Initial optimism about faster-than-expected credit growth for May quickly faded as it became clear most borrowing had been done by SOEs and local governments – meant to support new infrastructure and manufacturing investment. Bank deposits are quickly growing while the households that do borrow are taking out more short-term loans rather than medium-and-long-term ones. Similar to how retail sales are being concentrated on food and energy, households are now mostly borrowing to meet immediate needs. Underscoring current sentiment was the first recorded decline in outstanding mortgages in April – down 0.2% from March levels.
Nevertheless, a lack of appetite for credit is still not stopping regulators at the PBoC and CBIRC from urging banks to increase lending – somewhat ironic given that this in effect means asking them to lower their lending standards in the midst of a deleveraging campaign. Although the banks often ignore these “calls for action”, it will probably not help to reduce the amount of bad debt in the banking system.
Thinking and planning for the short-term
Monthly new household borrowing, RMB bn
Source: PBoC
Ineffective policies for a sticky downturn
Local officials are issuing vouchers and easing home purchase restrictions to stimulate demand, but negative sentiment is proving stickier than during previous downturns. Despite a sharp uptick in calls for direct stimulus to consumers, little has been done on the policy front. With land-sales at record lows and healthcare budgets bursting due to zero covid, local governments are more cash-strapped than ever. In Yunnan, local officials announced on June 19th a month-long shopping festival meant to stimulate consumption - a policymaker favourite. But with the issuance of coupons totalling 125m RMB, or 0.005% of 1% of Yunnan’s GDP, it will have virtually no impact. Similar struggles are seen in the real estate sector, with lower mortgage rates, down payment ratios and removal of restrictions for multiple home ownership – measures that were effective during previous property market downturns – proving ineffective in convincing homebuyers that it is safe to return to the market. The post-lockdown bounce currently witnessed in Shanghai and Beijing is not being replicated in other large cities, indicating that the rebound may be short-lived.
Jilin, the automobile manufacturing hub that went through China’s first severe omicron wave is now back under lockdown while several cities in Guangdong are ramping up testing as neighbouring Hong Kong and Macau are seeing large-scale outbreaks. As long as the zero covid policy is enforced and the housing market remains in a downward trend, there will effectively be a lid on economic activity – no matter how many times the senior leadership in Beijing says it will support the economy. President Xi Jinping argued on June 23rd that China will meet its economic growth targets for the year. But, if the Chinese consumer and homebuyer remain on the side-lines, and local governments are out of ammunition, then GDP growth of 2%-3% is perhaps more likely than 5.5%.
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