Trusted Insights for What’s Ahead™
Growth in retail sales accelerated to 3.2% y-o-y in September, up from 2.1% in August.
- This was driven by increased sales of durable goods thanks to the ongoing consumer trade-in program, especially cars and white goods, and is not indicative of a recovery in confidence levels. In fact, household spending slowed further in Q3, now at a 21-month low.
Sales of new energy vehicles (NEVs) surpassed sales of traditional cars for the third consecutive month due to strong policy support.
- NEVs took 53.3% of total car sales in September, 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 for NEVs,and from RMB 7,000 to RMB 15,000 for traditional cars. We expect this 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 from its ongoing downturn.
- Since May, the government has intensified support for the property sector, but with limited effect so far. In September, authorities announced a nationwide reduction of interest rates on existing mortgages, which would reduce rates by 50 basis points on average. According to the governor of China’s central bank (PBOC; People’s Bank of China), the cut would potentially save home buyers about 150 billion yuan (USD 21 billion) per year.
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 dampening confidence are not addressed. However, we do expect to see short-lived periods of pent-up demand releases during holidays and shopping festivals.
- The underlying factors dampening confidence levels include the downturn in the property sector and the resulting decrease in wealth levels as well as labor market weakness and lackluster income growth along with structural imbalances that drive the need for precautionary savings, e.g. the lack of a robust social safety net.
- 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. 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 above.
- Since late September, the government has announced a series of measures to support the economy. Despite the lack of direct support to boost consumption, we believe that measures such as stabilizing the housing sector and tackling the hidden debt of local governments will have some positive impact on consumption.
Trusted Insights for What’s Ahead™
Growth in retail sales accelerated to 3.2% y-o-y in September, up from 2.1% in August.
- This was driven by increased sales of durable goods thanks to the ongoing consumer trade-in program, especially cars and white goods, and is not indicative of a recovery in confidence levels. In fact, household spending slowed further in Q3, now at a 21-month low.
Sales of new energy vehicles (NEVs) surpassed sales of traditional cars for the third consecutive month due to strong policy support.
- NEVs took 53.3% of total car sales in September, 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 for NEVs,and from RMB 7,000 to RMB 15,000 for traditional cars. We expect this 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 from its ongoing downturn.
- Since May, the government has intensified support for the property sector, but with limited effect so far. In September, authorities announced a nationwide reduction of interest rates on existing mortgages, which would reduce rates by 50 basis points on average. According to the governor of China’s central bank (PBOC; People’s Bank of China), the cut would potentially save home buyers about 150 billion yuan (USD 21 billion) per year.
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 dampening confidence are not addressed. However, we do expect to see short-lived periods of pent-up demand releases during holidays and shopping festivals.
- The underlying factors dampening confidence levels include the downturn in the property sector and the resulting decrease in wealth levels as well as labor market weakness and lackluster income growth along with structural imbalances that drive the need for precautionary savings, e.g. the lack of a robust social safety net.
- 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. 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 above.
- Since late September, the government has announced a series of measures to support the economy. Despite the lack of direct support to boost consumption, we believe that measures such as stabilizing the housing sector and tackling the hidden debt of local governments will have some positive impact on consumption.
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