MNI: China’s Retail Spending To Grow 5% As 2023 Rebound Eyed

China’s retail sales could grow 5-6% in 2023 as Covid controls are eased, though renewed outbreaks in some of the country’s largest cities could delay reopening and weigh on Q4 sales, advisers told MNI.

The optimistic outlook for a rebound in consumer spending depends on fully implementing the “20 measures” outlined by the central government in early November as it seeks more targeted and less disruptive approaches to managing Covid, advisers said. The government was sparked into action as retail sales fell 0.5% y/y in October, compounding a somber outlook amid declining exports and weakening industrial production and investment. (See MNI BRIEF: PBOC Cuts RRR By 25bp As Covid Clouds Recovery)

Growing Covid-19 waves sweeping densely populated cities including Guangzhou, Chongqing and Beijing have spurred local governments to reintroduce mass Covid testing and travel restrictions.

“This will further pressure retail sales in the last two months [of the year] and it may see about 2% growth for the whole year compared with a 12.5% gain last year,” said Liao Qun, chief economist with the Chongyang Institute for Financial Studies. Liao calculates the contribution of final consumption expenditure to GDP may be around 50%, down from 65.4% in 2021.

Liao is upbeat about a recovery next year, even expecting a prospective “retaliatory rebound” in consumption supported by growth in savings this year. He believes there will be greater emphasis on normalising economic growth, as well as loosening Covid restrictions. He said a 5% GDP growth target for 2023 should be prioritised to compensate for this year’s lower growth, estimated to be around 3.5%.

REBOUND IN 2023

Consumer confidence will rebound once people are allowed to move more freely, said Kuang Xianming, deputy dean of China Institute for Reform and Development. He believes a recovery in services consumption, which is not accounted for in the retail sales figure, could be significant.

Per capita service consumption expenditure increased only 1.4% y/y in the first three quarters, though up 1.1 percentage points over the pace in the first six months of the year. However, growth is tame compared to 17.8% growth in 2021. Kuang believes per capita service consumption could rise 7-8% next year.

Lifting growth in consumers’ income is also needed as it has been lower than GDP growth. Per capita disposable income of urban residents grew 2.3% y/y in the first three quarters, after deducting inflation, which is a pace near historical low levels.

Reviving private sector businesses and stabilising employment are key to boosting income in the short term, said Kuang. Liao agreed that more targeted support should be provided to private and small businesses, lower-income groups, and industries impacted by the epidemic.

The People’s Bank of China should consider using relending tools to stimulate consumption, said Liao. He said continued tax cuts and reduced fees for business, coupled with the issuance of consumer coupons, was also necessary.

Every CNY1 in consumer coupons could produce CNY3.4-5.8 of spending, said Kuang. He said coupons should mainly be provided to low- and middle-income earners who have the highest propensity to consume and tap into potential services spending.

Kuang sees longer term growth in consumption being supported by growth of high-quality and internationalised services in education, health, and elderly care, which would require relaxing market access for foreign investment, and expanding institutional opening up with regard to rules, regulations, management, and standards. (See MNI POLICY: China's New Leaders Face Challenges In Reform Push)