China Consumption Outlook | Q4 2022

Executive Summary

China’s consumption slump is going into a new round, driven by a reimposition of COVID-19 controls to address a rise in cases across the country. Weakness in consumer confidence persists, as do downside risks for employment. Current events sometimes change the outlook overnight. Expect updates to each quarterly Outlook as new economic data is released, domestic policy changes are announced, and geopolitical realities shift.

Insights for What’s Ahead

• After four months of growth, retail sales contracted by -0.5 percent y-o-y in October, driven by a reimposition of COVID-19 controls to address a rise in new cases. The impact was mostly seen in offline consumer activities, with bricks-and-mortar retail sales declining by -6.8 percent y-o-y and spending on in-person consumer services by -8.1 percent. On a more positive note, online retail sales registered strong double-digit growth of 14.9 percent y-o-y.
• Weakness in consumer confidence persists, with China’s Consumer Confidence Index below the 100 mark for the sixth consecutive month in September (indicating that consumer sentiment is more negative than positive). It’s hard to see a recovery of confidence in the short-term given the ongoing wave of new COVID-19 cases and tightening of restrictions.
• Weakness in domestic consumer demand is holding down core inflation, which slowed to 0.6 percent y-o-y in October. A relaxation of China’s ‘dynamic zero-COVID’ approach is likely to lead to a rise in consumer inflation – China’s central bank (PBOC) has warned about a rise in inflationary risk as a result of this. However, we do not believe that such a relaxation is on the horizon given the rise in new cases following the recent ‘optimization’ of COVID controls.
• Per capita disposable income improved significantly in Q3, growing 6.5 percent y-o-y. But, going into Q4, all major economic indicators are trending downward. As long as economic weakness continues to weigh on the job market, income growth will remain subdued.
• Household spending also improved in Q3 but remains below pre-COVID levels and tilted towards life necessities. We did see an improvement in discretionary spending, but the drop in retail sales, rising household savings in October, and the ongoing wave of COVID-19 cases suggest that households will be very cautious spenders in Q4. Despite this, we believe that there is strong potential for China to see a robust recovery in household spending given the high level of savings. But the key requirement for this will be meaningful relaxation of COVID restrictions, which will take time.
• The property market has yet to show signs of recovery. There will likely be an escalation in policy support until there are signs of property sales bottoming out. The recently announced 16-point plan by the PBOC to ease financing restrictions in the sector is a positive sign towards this direction, but it remains to be seen if this will indeed revive confidence among prospective homebuyers.
• Sales growth of passenger cars (including NEVs) softened in October, in line with expectations that auto demand would moderate with the impact of policy incentives fading. Car sales will likely continue to outperform overall retail sales in Q4, largely due to supportive policy measures. But this trend is not sustainable into next year as authorities cannot support the measures indefinitely.
• New job creation data and PMI readings signal continued and worsening downside risks for employment. China’s urban unemployment rate is on the rise again, especially in big cities which are the most exposed to COVID-19 controls and business closures; youth unemployment declined but remains high. Improvement will depend on a recovery in consumer services and associated increases in hiring. Both are unlikely in the short term given current economic conditions.