Sign in
Research link-chevron Created with Sketch.
link-chevron Created with Sketch. Products and Services link-chevron Created with Sketch.
link-chevron Created with Sketch. Products and Services
Economics link-chevron Created with Sketch.
Equities link-chevron Created with Sketch.
Analysts
Analysts
Help and Support
Help and Support
02 October 2018

A consumer slowdown - likely

Jeremy Stevens

The confluence of the US-China trade war and China’s fixed asset investment slowing down spells a marked slowdown in Chinese consumption. Still, retail sales growth beat expectations in August, which is cause for some optimism. However, consumption, especially without specific targeted policy support, will likely crimp China’s economic growth

With retail sales rising by 9.0% y/y in August, from 8.8% y/y in July and above the 8.8% y/y expectation, we may seem too bearish. Certainly, rhetoric from Beijing in recent weeks has been trumpeting about the potential size of China’s domestic market, seemingly as some sort of enticement to the US. However, the reality is that China’s market is latent. This is precisely why the state council has been exploring ways to expand domestic consumption — especially property rental, autos and tech products. 

The largest drag on the headline number is auto sales — a heavily weighted sub-component —having contracted for some months now. Auto sales might have rebounded in July/August as consumers were believed to delay purchases, waiting for lower tariff costs in July. Those indeed came into effect in August but failed to move the dial. Instead, consumption was driven by purchases of petroleum, gold and precious metals, and necessity purchases — which hardly implies a particularly healthy consumer play. Indeed, Beijing is perhaps overstating the upgrading of consumption in China. Firstly, upgrading takes many years. Secondly, rising sales growth of instant noodles hardly signals that the process has even started. Lastly, China is in the midst of a structural down-gear in economic growth — known as the new normal. 

Consumption has decreased due to rising mortgage debt in the Mainland. The 51% of GDP household debt may not be alarming in terms of global ranking — but debt has doubled as a share of the economy since 2010, rising particularly precipitously in 2017. In fact, in just five years, mortgage debt has increased by CNY10trn. Debt repayments are now carving into consumption patterns, and high household indebtedness is problematic for policymakers because households are more likely to deleverage during a downturn. Also, the pending correction in house prices means that recent buyers are very aware of their debt. 

Also, household wealth has been crimped by sluggish wage growth, fragile stock markets, and the obliteration of P2P platforms (which has re-invigorated the market for wealth management products despite returns now being at a decade trough). Also, and not to be taken lightly, the trade war will hurt the, predominantly privately owned, exporters, and also show up in manufacturing investment and, presumably, employment. 

Without a tax cut (likely soon, as the National People’s Congress Standing Committee prioritized this during its session in August) and a better social welfare system (likely to take much longer), consumption growth will drift down further. 


Read PDF