Consumption is a major driver of China's economic expansion, accounting for over 70 per cent of GDP growth last year. However, some indicators have shown considerable weakness lately, with the annual growth in car purchases – 10 per cent of total retail sales – slowing by 8 percentage points and smartphone transactions slower too. Even household appliance sales have been quiet.
But beyond these 'big ticket' items, household consumption looks reasonably robust. Excluding cars, retail sales grew 9.1 per cent in 2018, well ahead of the 6.6 per cent underlying real GDP growth.
The central bank's urban-depositor confidence survey has continued its post-2015 recovery while the National Bureau of Statistics consumer-confidence survey has reached its highest level since 1993.
Overall urban household consumption grew by 9.2 per cent last year. Part of the explanation is a shift since the 2008 financial crisis in consumption patterns from goods to services. Rents are now included in the statistics, but spending on other services increased too.
Food, tobacco and liquor has declined over the decade from 42 per cent of total consumption to 37 per cent with clothing's share down from 11.5 per cent to 9.3 per cent while services increased from 6.9 per cent to 8.1 per cent with transport and telecommunications up from 14.0 per cent to 17.6 per cent. Education, culture and entertainment rose from 13.5 per cent to 15.1 per cent, and healthcare from 7.8 per cent to 9.4 per cent.
The biggest driver of household consumption is income growth. That remains intact. Nominal GDP growth has averaged 10.3 per cent a year since 2017 while disposable income grew by 8.1 per cent in urban areas and 9.2 per cent outside, partly thanks to the emphasis on rural development in economic policies.
As China's urban labour market continues to upgrade and even structurally tighten, it will put upward pressures on wages, supporting future urban consumption. We estimate that urban residents spend two-thirds of their income and this should continue to support future consumption growth.
Beijing's current round of private-sector-focused policy easing should further reinforce steady household consumption growth this year. Past rounds focused on the housing market and infrastructure investment, but the private sector accounts for more than 80 per cent of urban employment and almost all the net creation of urban jobs in recent years. By supporting labour-market stability and urban-wage growth this easing round should help sustain urban consumption.
What about the non-core drivers of consumption? We are sceptical of the housing market's so called 'wealth effect'. Ownership can have two opposite effects: on the one hand, rising prices reduce savings and squeeze disposable income and spending, but on the other, rising asset values can create a sense of wealth. However, with property equity difficult to realise, we believe any wealth effect is at best a secondary driver of consumption.
We also think trends in consumer credit availability should be less negative than last year, when tougher regulations slowed lending. Although lending growth remains soft by historical standards, there are signs it has bottomed, making it less of a headwind in 2019 as the macro economy improves amid strong consumer sentiment.
Further, besides the increase to disposable earnings from personal income-tax changes, cuts to VAT could boost consumers' purchasing power.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Qu Hongbin
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