A large number of tourists visit Hongya Cave, a cluster of buildings with popular restaurants, in China’s Chongqing city on April 30, during the May Day ‘golden week’ holiday. Revenge spending is in full swing in the country. Photo: VCG
Opinion
Macroscope
by Nicholas Spiro
Macroscope
by Nicholas Spiro
Why the glass-half-empty view of China’s economic recovery needs a rethink
China’s domestic consumption-led recovery means that the spillover effects on the rest of the world are less pronounced
The bleak US outlook has put China’s performance under close scrutiny, and Western business expectations are running ahead of reality
Barely a day goes by without a sign of disappointment and scepticism about China’s post-Covid recovery. While the doubts are voiced mostly by investment strategists and economists, the heads of a growing number of Western multinationals have begun to express their misgivings.
On May 3, the chief executive of Qualcomm, the largest producer of smartphone processors, said the expectation was that “following the reopening, the China market was going to bounce back” but “we have not seen those signs yet”.
Even hospitality and consumer goods companies are sounding a note of caution. On April 26, the chief executive of Hilton said “China has been a little bit slower to … pick up steam on the development side”, while on May 2, the chief financial officer of Starbucks said “there’s a lot that we’re navigating” in China, adding that the coffee chain expected its business in the country to grow “at a more moderate pace” later this year.
To be sure, some other big Western firms, particularly in the luxury goods sector, are distinctly bullish, while several Wall Street banks remain upbeat about China’s reopening. Bank of America recently upgraded its forecast for Chinese growth this year to 6.3 per cent, significantly above the government’s 5 per cent target.
Indeed, according to the findings of Bank of America’s latest global fund manager survey, published on April 18, an overweight position in Chinese stocks – which remain cheap compared with their US peers – was still one of the most popular trades in markets.
Yet, there is a palpable lack of confidence about the strength and durability of China’s rebound among many Western companies and financial institutions. Ever since China abruptly scrapped its zero-Covid policy, a glass-half-empty view of the recovery has held sway, with its weaknesses overshadowing its strengths.
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This is partly due to the patchiness of the upturn. While manufacturing activity contracted last month for the first time since December, the services sector is benefiting from the dramatic increase in domestic tourism trips and revenues, which now exceed 2019 levels.
The scepticism is also attributable to inflated expectations at the start of this year. The principal cause of the disappointment, however, is the tendency on the part of many Western businesses and investors to look at China’s rebound through the prism of the stimulus-fuelled infrastructure investment that characterised previous recoveries, notably in the aftermath of the 2008 financial crash.
Yet, it was obvious long before China reopened that the current upturn would be quite distinct from the unleashing of credit that drove earlier recoveries. The overhang of debt, excess industrial capacity, the distress in the property market and Beijing’s prioritisation of financial stability precluded a massive opening of the fiscal taps.
This is why the spillover effects from China’s rebound on the global economy and markets have been relatively muted. A domestic consumption-led – as opposed to investment-driven – recovery means the direct impact on the rest of the world is less pronounced. It does not mean, however, that the reopening is globally inconsequential, or that Chinese policymakers should revert to their old playbook.
For some time now, the international community has been urging China to rebalance its economy away from investment towards consumption. While there are reasons to be concerned about the resilience of the Chinese consumer – high youth unemployment, the downturn in the housing market and the absence of the cash handouts that helped power post-Covid recoveries in the US and elsewhere put China at a disadvantage – revenge spending is in full swing.
Nomura, which has long been cautious about the outlook for China’s economy, said in a report published after the “golden week” holiday said that it is “wrong to underestimate the revenge spending on travel after three years of Covid”.
02:17
Thousands of tourists flock to China’s Great Wall during ‘golden week’, as travel numbers rebound
Thousands of tourists flock to China’s Great Wall during ‘golden week’, as travel numbers rebound
While the eye-popping growth rates are distorted by base effects and will normalise as pent-up demand wanes, Chinese consumption is compensating for a sickly and increasingly vulnerable global economy. A report published by the International Monetary Fund last week showed that China alone will account for 35 per cent of global growth this year, with India contributing a further 15 per cent.
The bleak outlook for advanced economies, in particular the United States, has put the performance of China under increased scrutiny, so much so that expectations – which were too high to begin with – are running ahead of reality.
There is a limit to how well China can perform when external demand is so weak, geopolitical tensions are becoming more acute and the risk of a major financial shock is increasing as global interest rates and inflation remain at high levels.
It is not a coincidence that concerns over the strength of China’s rebound are mounting just when financial and economic threats in Western economies – particularly the escalating crisis over lifting the US debt ceiling – are increasing.
Yet, China is unable and unwilling to be a shock absorber for weaknesses and vulnerabilities in the rest of the world. The country’s recovery is uneven and fragile in many areas. But those who are disappointed should think about how much more dire things would be today if China had not reopened so quickly, a scenario that seemed unlikely just six months ago.
