At a Glance
- 78 percent of China’s growth is due to domestic consumption. A slowdown in consumer spending there could ripple through the global economy.
China has entered the Year of the Earth Pig. Astrology experts prophesize that those born this year will be good-natured, calm and lucky. Recent economic data suggests that these resilient characteristics will prove useful.
The official GDP report issued on January 21 was far from auspicious. Q4 2018 GDP growth (6.4 percent) was the worst since early 2009, the aftermath of the global financial crisis.
The mercantilist economic policies of yesteryear may still vex some in Washington. But the facts on the ground are that domestic consumption, not exports, is by far the biggest determinant of Chinese growth (78 percent of GDP). A $13 trillion economy means that Chinese consumers matter just as much to the rest of the world as they do to authorities in Beijing. But their current mood is harder to read than headline statistics.
Bigger Than Black Friday
China’s Singles’ Day (November 11) is now the biggest retail event on the planet. 2018 broke all previous records for spending. To put it into context, Alibaba Group had double the sales volume than the entirety of the U.S. e-commerce sector on Black Friday and Cyber Monday combined. It ended the day with $30.8 billion added to revenues. However, overall monthly retail sales growth in November fell to its lowest level since 2003 (8.1 percent).
There are good reasons to believe that this does not herald a dramatic decrease in Chinese consumer spending. Policy effects, both good and bad, may be slowly working their way through to consumers and official statistics. Fully 50 percent of the decline in retail sales in the second half of 2018 was due to the auto sector. This can in part be explained by the end of tax relief for purchasing smaller cars.
Changing Monetary Policy
Chinese authorities have not been sitting idly by as growth and consumption has swooned. In October, the threshold for monthly taxable income was raised to 5,000 yuan. Monetary policy has also been loosened. The People’s Bank of China (PBOC) issued new lending quotas for policy banks in November and in January, a two-stage cut in the RRR (required reserve ratio) released 800 billion yuan of liquidity.
The December Central Economic Work Conference shifted the official monetary policy stance from “prudent and neutral” to “prudent with appropriate looseness and tightness.” This precisely echoes the language used in 2015 when monetary policy loosened significantly.
Fiscal levers are also being pulled. Local governments have been given permission to issue bonds equivalent to 64 percent of the 2018 quota, before the 2019 allocation is officially announced. The high-speed rail network in 2019 will expand by 3,200 kilometres, a 45 percent increase over 2018. China has scope for further fiscal largesse that most western governments would envy. Its government debt-to-GDP ratio is still below 50 percent and Chinese Government Bonds (CGBs) are about to be included in global indices for the first time this year.
Robust Job Market
But what matters most to consumers is their incomes and job security. So far, Chinese labor markets have been robust. Urban registered unemployment is 3.8 percent, an historical low. The official data may be of questionable quality, but real-time surveys from employment agencies in 100 major cities suggest the demand-to-supply ratio remains healthy with some weakness in the manufacturing sector being compensated for by services (Figure 1).
The Chinese hard landing story has become a financial markets trope. With the International Monetary Fund warning of a global slowdown, economic commentators should be careful of what they wish for. It used to be said that when America sneezes the world catches a cold. In the Year of the Earth Pig, if Chinese consumers cough, pandemic-level flu may follow. For any financial markets investor, the mood of the Chinese consumer is certainly an important indicator in 2019.