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Incentives for Chinese car buyers were welcomed by the industry, but a report suggests sales have lost momentum. Photo: AFP

China’s consumer spending expected to weaken further this year as result of escalating US trade war tensions

  • Job and income growth uncertainty means consumers remain cautious about spending
  • Retail sales growth for July predicted to slow as effect of cars sales incentives wear off

Chinese consumer spending is likely to slow for the rest of the year as a result of the uncertainty created by trade tensions with the United States, analysts said.

This could exert downward pressure on economic growth, given that the government is counting on the consumer to play a big part in mitigating the effects of the trade war.

The role of consumption in China’s economic growth has changed in recent years – it accounted for 76 per cent of gross domestic product (GDP) growth in 2018, up from less than 50 per cent in 2011.

This change was mainly the result of a slump in manufacturing investment, analysts said. That, in turn, could slow income growth and consumer confidence given that a significant share of workers’ salaries in China still comes from the manufacturing and export sectors.

“It’s certainly not going to be a case where the consumer comes to the rescue, because in China’s case, the consumer is also suffering from the trade war,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“Actually, the trade war is negative for consumption because it affects consumer confidence and it affects real income growth.”

The per capita growth rate for China’s consumer spending was about 8 per cent in June, compared with about 10 per cent in June 2018, according to Andy Rothman, an investment strategist with Matthews Asia. In comparison, per capita disposable income growth was 9 per cent in June, the same as a year earlier.

Chinese consumers have been holding back on buying cars, property and other goods and services. A survey by China’s central bank last week showed that 79 per cent of respondents wanted to save money rather than spend it.
It’s certainly not going to be a case where the consumer comes to the rescue, because in China’s case, the consumer is also suffering from the trade war
Julian Evans-Pritchard

In a recent report, Bank of America Merrill Lynch predicted that the retail sales growth rate compared to a year earlier – before accounting for inflation – would slow to 8.6 in July from 9.8 per cent in June. This was largely because car sales, which were boosted by big discounts before higher emission standards took effect on July 1, lost momentum.

Online goods sales growth could also ease following annual promotions at e-commerce platforms such as JD.com and Tmall.com on June 18, Bank of America Merrill Lynch said.

Lisheng Wang, an analyst at Japanese lender Nomura Bank, said that China’s consumption trends have been very volatile this year, as personal income tax cuts and other measures to stimulate the consumer economy had a limited effect on spending.

“It is widely expected that China’s economic growth will continue to slow this year,” Wang said. “But the biggest uncertainty really comes from US-China trade negotiations and whether tensions will escalate.”

Wang predicted that the US would increase the tariff rate on US$300 billion of Chinese imports to 25 per cent by the end of the year after the 10 per cent tariffs on goods not yet subject to sanctions take effect on September 1.

If the US raises the tariff rate to 25 per cent, China’s GDP would be directly cut by 0.4 per cent because of falling exports and by another 1 per cent because of lower manufacturing investment caused by supply chain disruption. The impact of the 10 per cent tariff would be proportionally lower, Wang said.

So far, the Politburo, the highest decision-making body of China’s ruling Communist Party, has made no major announcement of additional monetary or economic stimulus to offset the effect of higher tariffs.

It has been reluctant to use a large-scale stimulus, choosing to continue with help for specific areas of the economy. At its meeting in late July, the Politburo also firmly rejected the idea of easing its restrictions on the housing market to increase activity, instead maintaining curbs to contain housing price growth.

“Given the current environment of elevated trade policy uncertainty, private corporate sector confidence in China is likely to remain muted and the effectiveness of the tax cuts has been dampened,” said Robin Xing, an economist at Morgan Stanley.

Given the current environment of elevated trade policy uncertainty, private corporate sector confidence in China is likely to remain muted and the effectiveness of the tax cuts has been dampened
Robin Xing

Xing predicted that Chinese GDP growth could slow to 6 per cent by the fourth quarter. If the US raises tariffs on all imports from China to 25 per cent within four-to-six months and Beijing responds, China’s GDP growth rate could slip to 5.7 per cent.

Moreover, the increasing number of corporate defaults and worries about the credit worthiness of Chinese companies are also dampening the effect of monetary and fiscal policy easing, despite the People’s Bank of China cutting bank reserve requirement ratios significantly and injecting liquidity directly into the system, Evans-Pritchard said.

China’s credit defaults have been rising this year. HengFeng Bank this week became the third troubled lender in as many months to be taken over by the state in a debt restructuring. It was one of more than a dozen city-level and rural lenders that were put on notice by the authorities to expect a shake-up, as regulators clamp down on financial malfeasance and profligate lending.

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