Trusted Insights for What’s Ahead™
Growth in retail sales improved to 4.8% y-o-y in October, up from 3.2% in September.
- This was mainly driven by the ongoing consumer trade-in program and the “Singles Day” online shopping festival which now lasts several weeks and started in mid-October. The sustainability of this growth is questionable as consumer confidence remains weak. In fact, the consumer confidence index reached its lowest score in 22 months.
Sales of new energy vehicles (NEVs) continued to surpass sales of traditional cars due to strong policy support.
- NEVs took 52.9% of total car sales in October, thanks to government support, low prices, and the ongoing contraction in sales of internal combustion engine (ICE) cars.
- In August, the government doubled auto trade-in subsidies from RMB 10,000 to RMB 20,000 (about $2,700) for NEVs, and from RMB 7,000 to RMB 15,000 for traditional cars. We expect this, together with the year-end promotion, to help drive car sales for the rest of the year, especially for NEVs.
Because of weak consumer confidence and household reluctance to take on debt, the property sector continued to contract despite government support.
- While the declines of some key property indicators have narrowed and stabilized at low levels in recent months, we think it is still too early to take this as a signal that the property sector is close to bottoming out.
- Since May, the government has intensified support for the property sector, but with limited effect so far. In September and October, China’s central bank (PBOC; People’s Bank of China) announced a nationwide reduction of interest rates on existing mortgages (50 basis points on average) and the five-year loan prime rate (25 basis points). In November, the government announced a cut on home purchase deed taxes to as low as 1% from a current level of as much as 3% and the elimination of VAT on homes owned for at least two years.
While China's headline unemployment rate improved, this gain contrasts with the Purchasing Managers’ Index (PMI) employment subindices indicating ongoing job-market weakness.
- The discrepancy is largely attributed to the National Bureau of Statistics' loose definition of employment, which considers anyone working over an hour per week as employed
Looking ahead, we expect consumption growth to remain moderate as Chinese consumers continue to be risk-averse and price-sensitive as long as the underlying factors undermining confidence are not addressed. However, we anticipate short term burst of pent-up demand during holidays and shopping festivals.
- The underlying factors dampening confidence include the downturn in the property sector which has reduced wealth levels along with labor market weakness, lackluster income growth, and structural imbalances. These issues, such as the absence of a robust social safety net, drive the need for precautionary savings.
- In addition, since July, the government intensified support for consumer trade-in programs, subsidizing up to 20% of sale price of households’ purchases of cars, white goods, and furniture. So far, the program has been the main driver of retail sale growth in recent months. In November, the government announced that it would step up efforts to expand the consumer trade-in programs in 2025, but without providing details. The trade-in programs are expected to support sales of goods in the short term, but this is unlikely to have a substantial or lasting effect on consumption for the reasons stated earlier.
Trusted Insights for What’s Ahead™
Growth in retail sales improved to 4.8% y-o-y in October, up from 3.2% in September.
- This was mainly driven by the ongoing consumer trade-in program and the “Singles Day” online shopping festival which now lasts several weeks and started in mid-October. The sustainability of this growth is questionable as consumer confidence remains weak. In fact, the consumer confidence index reached its lowest score in 22 months.
Sales of new energy vehicles (NEVs) continued to surpass sales of traditional cars due to strong policy support.
- NEVs took 52.9% of total car sales in October, thanks to government support, low prices, and the ongoing contraction in sales of internal combustion engine (ICE) cars.
- In August, the government doubled auto trade-in subsidies from RMB 10,000 to RMB 20,000 (about $2,700) for NEVs, and from RMB 7,000 to RMB 15,000 for traditional cars. We expect this, together with the year-end promotion, to help drive car sales for the rest of the year, especially for NEVs.
Because of weak consumer confidence and household reluctance to take on debt, the property sector continued to contract despite government support.
- While the declines of some key property indicators have narrowed and stabilized at low levels in recent months, we think it is still too early to take this as a signal that the property sector is close to bottoming out.
- Since May, the government has intensified support for the property sector, but with limited effect so far. In September and October, China’s central bank (PBOC; People’s Bank of China) announced a nationwide reduction of interest rates on existing mortgages (50 basis points on average) and the five-year loan prime rate (25 basis points). In November, the government announced a cut on home purchase deed taxes to as low as 1% from a current level of as much as 3% and the elimination of VAT on homes owned for at least two years.
While China's headline unemployment rate improved, this gain contrasts with the Purchasing Managers’ Index (PMI) employment subindices indicating ongoing job-market weakness.
- The discrepancy is largely attributed to the National Bureau of Statistics' loose definition of employment, which considers anyone working over an hour per week as employed
Looking ahead, we expect consumption growth to remain moderate as Chinese consumers continue to be risk-averse and price-sensitive as long as the underlying factors undermining confidence are not addressed. However, we anticipate short term burst of pent-up demand during holidays and shopping festivals.
- The underlying factors dampening confidence include the downturn in the property sector which has reduced wealth levels along with labor market weakness, lackluster income growth, and structural imbalances. These issues, such as the absence of a robust social safety net, drive the need for precautionary savings.
- In addition, since July, the government intensified support for consumer trade-in programs, subsidizing up to 20% of sale price of households’ purchases of cars, white goods, and furniture. So far, the program has been the main driver of retail sale growth in recent months. In November, the government announced that it would step up efforts to expand the consumer trade-in programs in 2025, but without providing details. The trade-in programs are expected to support sales of goods in the short term, but this is unlikely to have a substantial or lasting effect on consumption for the reasons stated earlier.
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