China’s retail recovery still rests on richer consumers

SHANGHAI • Chinese consumers are finally starting to spend again after the pandemic-induced slump, but the recovery is unbalanced and overly reliant on luxury goods, with poorer Chinese still cautious.

Consumption has started to catch up to the much stronger rebound in industrial output, with retail sales growing in August for the first time this year. Spending on luxury goods, cars and electronics is leading the charge, rising faster than food, clothing and other essentials.

While the supply side of China’s economy has shown resilience, a strong and broad rebound in spending is needed for a more meaningful economic recovery. Even though the virus is under control, income and job losses due to the pandemic have made poorer Chinese unwilling or unable to increase spending, keeping a lid on the rebound.

“Higher-income households have probably built up savings, because of the forced reduction in consumption during lockdown, and could now be ready for a spending spree. It is lower-income households that face a longer slog of normalising their finances,” He Wei, an analyst at Gavekal Dragonomics, said in a recent report.

“Consumer confidence appears to be coming back even without a vaccine. This is reflected in strong pickups in sales of non-essentials, such as cosmetics and jewellery, in recent months. Improved sentiment and spending at home in lieu of overseas trips should help support private consumption.” said Chang Shu and David Qu of Bloomberg.

Luxury spending in China will grow 20%-30% this year, according to a report from Boston Consulting Group, but much of that growth is going to come from consumers in the 50 largest and richest cities.

People in the other 2,206 cities bought only a quarter of all luxury goods in April-July this year, and their spending was down 4% compared to 2019, according to the report.

The lopsided recovery can also be seen in the car market. Sales of luxury vehicles have recovered much quicker than regular cars, and are now almost a fifth of all cars sold.

“The Mainland China retail market showed strong recovery over recent months, as driven by some pent up demand,” a spokesperson of Chow Tai Fook Jewellery Group Ltd said in a statement to Bloomberg.

But it’s hard to say if this demand rebound can sustain. While Chinese consumers remain more confident about the future spending than most major Asian markets, 75% of Chinese respondents are still planning to cut back their expenses in the next three to six months amid the economic uncertainties triggered by Covid-19, according to a Nielsen report in September.

Travel is another sector where there’s still a long way to go to recover from the damage caused by the pandemic. Real-time data from China’s 11-biggest cities shows that people are still somewhat wary about going out via public transport. — Bloomberg