MNI: China's Consumption Rebound On Track But Risks Remain

High frequency data including measures of air traffic and subway riding indicate Chinese consumption has rebounded since the start of the year, but while this reduces the need for monetary stimulus, economists told MNI that this weekend’s National People’s Congress is still likely to see more fiscal spending and moves to boost the labour market.

Air passenger traffic jumped 34.8% y/y during January, according to the Civil Aviation Administration of China, and Air China reported revenue passenger kilometers up 62% y/y and 121.6% m/m in February. Chengdu’s subway network transported 178 million passengers during the 40-day Spring Festival Period, up 4% over the same period in 2022, state media reported, while new vehicle sales jumped 27% y/y in the first week of February, retracing some of January’s 35% y/y fall.

As the rebound in China's USD6 trillion consumer economy gathers pace from November lows with the easing of nearly three years of Covid restrictions and as savers draw on accumulated pandemic era savings of USD2.6 trillion, Nathan Chow Hung Lai, Vice President at DBS Bank, saw little need for monetary action such as a cut to the People’s Bank of China’s benchmark Loan Prime Rate.

“It seems China’s economy is gaining ground based on the latest high frequency data, so I don't think there is a pressing need for a near-term cut to the LPR,” Chow Hung Lai said, though he noted that the National People’s Congress will still be aware of doubts over how much domestic demand can recover given labour market weakness. (See MNI: China’s NPC To Target Growth Above 5% With Help From PBOC)

“Policymakers at the upcoming NPC will probably increase the fiscal deficit target for 2023 to around 3% of GDP from last year's 2.8%, as they need to stimulate the labour market and secure the spending rebound.”

China’s official business activity index for the service industry was 55.6% in February, 1.6 pp higher m/m, with its new order index and business activity expectation index up 3.1 and 0.5 pp m/m respectively, according to the National Bureau of Statistics on Wednesday.

Adding to the optimism, new yuan loans surged to a record monthly high of CNY4.9 trillion in January, according to the PBOC. This increase “indicates high demand for a business recovery,” said Iris Pang, ING's Chief Economist for Greater China. “The PBOC doesn’t need to change interest rates.”

PEOPLE'S CONGRESS

Dan Wang, Chief Economist of Hang Seng Bank, said the People’s Congress is likely focus on supporting employment in manufacturing and construction, both hit by slowdowns in world demand and real estate. (See MNI INTERVIEW: China Must Invest For Long Term Growth - Huang)

“Up to one million workers in construction and manufacturing are likely to lose their jobs if these two sectors don't pick up soon,” Dan said, adding that authorities will likely focus on boosting infrastructure and the housing market to secure jobs.

Youth unemployment was 17.3% in January, with urban unemployment across 30 major cities at 5.8%, according to the National Bureau of Statistics.

Signs of consumption strength come despite concern expressed by the PBOC in its latest quarterly report over conservative spending habits developed during the pandemic.

Alibaba, once a target of a tech crackdown, said January bookings were up 500% y/y on its travel platform Fliggy, and Alibaba Pictures took over $1 billion in ticket sales in the last week alone, exceeding pre-Covid levels. Sales of luxury ski clothing and equipment jumped 170% y/y, via its platform Tmall Luxury Pavilion.

Purchases of flowers during February’s Valentines Day week increased 300% on the week before, According to JD.com. Yum Group, owner of KFC and Pizza Hut chains, has announced plans to open 1,100 to 1,300 new stores in 2023, with CEO Joey Wat saying he was “excited to see positive momentum” during January and February.

Household consumption still only accounts for around 40% of China’s GDP, compared to 68% in the U.S. and 52% in the European Union, according to McKinsey.