China’s consumer-driven recovery is flashing warning signs as spending on everything from holiday travel to cars and homes loses momentum, adding to expectations for more stimulus to support the economy.
Domestic travel spending during the recent holiday for the dragon-boat festival was lower than pre-pandemic levels, according to official data released this weekend. Home sales figures are below the level in previous years, while estimates for June car sales showed a drop from a year ago.
The rebound in consumption after China shed its Covid controls has propelled growth so far this year, but confidence is weak and evidence is mounting that the economy may need more help. After the central bank cut policy rates earlier this month, economists raised their expectations for more monetary and fiscal stimulus, and state-run media outlets have also published a series of articles in recent days highlighting possible avenues of support.
The holiday tourism data pointed to “fading post-Covid recovery momentum for in-person services,” Lu Ting, chief China economist at Nomura Holdings Inc., wrote in a Sunday research note. He noted the average spending per trip was about 16% lower than in 2019, “implying either a weaker intention to spend or less purchasing power.”
“As pent-up demand fades and the risk of an economic double-dip becomes more real in coming months, we expect in-person services consumption growth to weaken further,” Lu wrote.
Not all of the recent data suggests a slowdown, with box office revenue reaching the second-highest amount on record for the dragon-boat holiday, the official Xinhua News Agency reported. But other indicators provide evidence that spending isn’t gaining momentum.
Home sales in major cities were muted through the first few weeks of June and over the holiday period, the 21st Century Business Herald reported, citing research analysts. Passenger car sales in the month are expected to have dropped nearly 6% from last year, according to preliminary estimates from China’s Passenger Car Association.
Growing concern over growth have fueled speculation about the possibility of increased stimulus this year.
Last week, Wang Huning — the No. 4 official in China’s ruling Communist Party — held a meeting with representatives of other Chinese political parties to discuss policy suggestions for reviving consumption. Then on Monday, two state-run securities newspapers floated a series of suggestions from analysts on policy options Beijing could consider.
One fiscal measure would be to accelerate the sale of special local government bonds — a key source of infrastructure funding — so that local authorities use most of their quota by the end of the third quarter, according to the China Securities Journal, citing economist Gao Ruidong at Everbright Securities. Local governments have so far been been slow to use their quota this year.
Shanghai Securities News, meanwhile, reported that further monetary easing — including cuts to interest rates and the amount of cash banks need to keep in reserve — are likely in the second half of the year.
However any stimulus is unlikely to be large in scale, according to Louis Kuijs, chief economist for Asia Pacific at S&P Global Ratings. The firm cut its forecast for China’s 2023 gross domestic product growth to 5.2% from 5.5%, citing the uneven recovery.
The government could still consider measures like easing housing purchasing restrictions and mortgage down-payment requirements, along with possible “fiscal support for consumption,” Kuijs wrote in a Sunday report. While the “recovery in consumer confidence is slow,” he said, some retail sales and discretionary spending data has held up, suggesting an expansion through the rest of this year and into 2024.
