China Consumption Monthly Roundup

China Consumption Monthly Roundup | July 2024

26 July 2024 / Report

Policy support is helping drive new energy vehicle (NEV) sales, but remains insufficient to stop the property downturn

Growth in retail sales slowed to 2.0% y-o-y in June, down from 3.7% in May

This was due to the fading of pent-up demand released over the May Day holiday and the annual 618 online shopping festival. In addition, household income growth moderated in Q2, likely driven by the ongoing weakness in the labor market, which we expect to further constrain consumer spending.

Policy support is helping drive new energy vehicle (NEV) sales, but remains insufficient to stop the property downturn

Continued government support has boosted sales of NEVs compared to traditional cars. While steep discounts on NEV prices helped drive sales over the Jan-Apr period, subsequent months have seen a reduction in discounts, while some foreign brands have announced their withdrawal from the price war.
The government is likely to accelerate support to alleviate the ongoing property malaise. The decisions reached at the third plenary session of the 20th Central Committee of the CPC (aka. “Third Plenum”), which concluded on July 18, include increasing the supply of subsidized housing, promoting urban residency for migrant workers, and empowering city governments to relax restrictions. The labor market remains under pressure
While the headline unemployment rate remained stable in June, Purchasing Managers’ Index (PMI) employment subindices persisted in contractionary territory, indicating weak hiring intentions. Meanwhile, unemployment amongst the young (16-29 years) remains much higher than other cohorts.

Looking ahead, we expect consumption growth to remain moderate

While we expect continued sporadic releases of pent-up demand during holidays and e-commerce shopping festivals, we believe Chinese consumers will generally remain risk-averse and price-sensitive as long as the underlying factors dampening confidence levels are not addressed. Chief among these is the downturn in the property sector because and the resulting decrease in consumer wealth levels. Other factors include labor market weakness and slower income growth as well as structural imbalances that drive the need for precautionary savings, e.g. the lack of a robust social safety net.

The Third Plenum announced reforms to expand domestic consumption

These include improving income distribution and employment systems, strengthening the social security system and enhancing the accessibility of basic public services.
Worth noting are the reforms that were announced to increase the fiscal capacity of local governments, many of which are struggling with high debt levels. As these governments are responsible for delivering most public services, these reforms should enable them to play a more significant role in improving people’s livelihoods. This, in turn, should ultimately reduce the people’s need for precautionary savings.
Still, concrete measures to implement the reforms have yet to come, and although the Third Plenum set a 2029 deadline to accomplish them, it will likely take more time for their effect to be fully realized. We therefore do not expect a significant improvement in consumption in the short term.