MNI: China Faces H2 Headwinds As Consumption Weakens

The Chinese economy faces potential headwinds in H2 2023 as a consumption rebound stalls and weak demand drags down manufacturing, while legacy, pre-pandemic structural challenges persist, economists and advisors told MNI.

Recent leading indicators show manufacturing recovery on shaky ground, as production recovers faster than demand following the country’s reopening, leading to excess supply. Softer demand has also weighed on employment, said Wang Zhe, chief economist at Caixin Insight Group which compiles the monthly Caixin Purchasing Manger’s Index (PMI).

The services sector rebound has also likely peaked as income and employment indicators point to weak momentum and consumer sentiment deteriorates, Wang noted. The low comparison base, however, will contribute to strong economic performance in Q2 with GDP expanding about 8%, he added. (See: MNI: China Q1 GDP Seen Up 4%, But Demand Weak Into H2-Advisors)

Official manufacturing PMI dropped unexpectedly to 49.2 in April – contractionary territory – after a three-month expansion, according to recent data from the National Bureau of Statistics. The figures showed the biggest fall in the same period on record. Services PMI also fell to 56.4 from 58.2 in March. Caixin manufacturing PMI indices, which are heavily weighted to private companies which are more sensitive to the economic climate, also performed poorly.(See: MNI BRIEF: China's April PMI Falls To Contraction Zone)

Wen Bin, chief economist at China Minsheng Banking Corp, predicted production and consumption will jump in April thanks to base effects as industrial output surges 8% y/y from March’s 3.9%, while retail sales soar 25% y/y compared with 10.6% last month.

UNSUSTAINABLE CONSUMPTION

Domestic tourism rebounded over the recent five-day Golden Week Labour Day holiday, as locals embraced their freedom following the pandemic. According to the Ministry of Culture and Tourism, 274 million tourists traveled during the holiday, up 19% from the pre-pandemic 2019 period. However, tourism income expanded slower than the number of tourists, with income growing just 0.66% compared to 2019, indicating consumers remain cautious.

Wang said income forecasts are less optimistic than before Covid-19 which changed consumption models as Chinese citizens switched to saving. The “knee-jerk” jump in spending on tourism and catering after three years of lockdowns could fade fast in Q3, he said.

According to EJ Real Estate R&D Institute, new house sales fell by 50% during Golden Week compared to the same period of 2019 in 18 key cities. In a note, the institute called for more stimulus measures to curtail pressure in the property market.

Authorities should consider another round of efforts to boost consumption in Q2 and Q3, such as issuing more consumer coupons, Wang said. He expects the People’s Bank of China to remain accommodative and to support key sectors via targeted relending tools, though problems caused by sluggish credit and consumption may not be resolved over the short term.

LONG-AND MID-TERM TROUBLES

For economists and advisors, structural issues will continue to weigh on the economy and intensify after the post-pandemic rebound cools.

Zhang Junwei, senior researcher at the State Council’s Development Research Center, said the same factors that caused growth to flag before the pandemic, prompting a fierce debate within the economic establishment over whether to take measures to ensure the economy continued to expand at a 6% rate, still persist today.

Three factors that drove growth in the first decade of this century – rapid industrialisation which boosted innovation and employment, active local government financing and investment and a benign external environment – are losing steam. Leading industries must swiftly adapt to post-industrialsation and local governments should curb indebtedness and reduce spending as land sale income declines.

Zhang suggested authorities should lower interest rates to boost confidence and soothe deflationary concerns, but to avoid easing too much, which would inflate asset-price bubbles further.

During the recent politburo meeting chaired by President Xi Jinping, the top policymaker said the economy faced challenges driven by weak demand, stressing the importance of high-quality development. (See: MNI BRIEF: China Boosts Demand Via Positive Policy: Politburo)

Wang said there is still significant space for stabilising growth, for example, by infrastructure investment in digital transition and updating rural public infrastructure.