China's Consumption Is Slowing Down

Market News

China's Consumption Is Slowing Down

Even as the Chinese economy started off on a strong footing in 2017, data also points to slowing consumption, which could eventually hurt economic growth. Data released last week showed improvement in industrial production, investment and property data for January and February, as effects from strong infrastructure spending and monetary easing carry over from last year. Figures for the first two months are usually combined to factor in the Lunar New Year holiday.

However, retail sales clocked the slowest increase in 11 years, with a 9.5% rise in the two-month period, according to the National Bureau of Statistics, compared with a 10.9% increase in December. The retail sales report "suggests that final demand is not as strong as people expect," said BBVA Research economist Xia Le. That combined with expectations that momentum from the stimulus and a still-vibrant property market will fade in coming months, prompting predictions that growth could weaken in the second half of the year. "The cyclical recovery is going to run out of steam this year," Xia said.

Car sales surged 10.1% in 2016, data from the statistics bureau showed, as tax cuts for car buyers aimed at stimulating the economy encouraged consumers to move forward their purchases, economists said. The tax cuts have since been partially rolled back; auto sales fell 1% year over year in the first two months of 2017, data showed. "They've overdrawn part of consumers' purchasing power," Xia said. Amid China's economic slowdown, many consumers remain apprehensive. Hu Pingjun, a 59-year old retiree from a state-owned textile mill who was shopping for vegetables in Beijing, said she has no plans to buy major appliances or other large items given that the family is working to pay down a mortgage and car loan. "We always try to save for the future by, for example, purchasing fewer clothes," Hu said. "Overall, our spending outlook is not very bright."

Consumption ultimately will need to pick up for China to meet its target of 6.5% growth this year, economists say. Value-added industrial output, a proxy for economic growth, expanded by a faster-than-expected 6.3% in the first two months of 2017 from a year earlier, compared with 6% growth in December. Investments in factories, buildings and other fixed assets in urban areas rose by a better-than-expected 8.9% year over year in the January-February period, compared with an increase of 8.1% in 2016.

There had been concerns that investment had been dominated by the state and led by stimulus spending. Sheng Laiyun, a spokesman with the statistics bureau, said private investment in property, factories and other capital goods tied to Beijing's public-private infrastructure projects is noticeably better. "The business environment has improved," he said in a briefing. Economists say China is walking a fine line as it tries to stimulate the economy enough to prevent a sharp drop in output while attempting to address rising debt and widespread industrial overcapacity built up after years of stimulus policies and high levels of investment.

"It is not possible for such strong growth in investment to last long," said Mizuho Securities Asia Ltd. economist Jianguang Shen, who expects growth to peak in the first quarter at 6.8%. "Things will start to slow down after that," he added. Last week at the annual National People's Congress, China's legislature, Beijing vowed to tackle mounting debt and reduce steel production capacity by 50 million metric tons this year, building on capacity cuts of 65 million tons in 2016. China is the world's largest consumer and producer of steel.

But 60% of the steel capacity cuts last year involved already mothballed plants, according to industry groups. And despite the announced cuts in capacity, actual steel production grew 1.6% in 2016, according to Moody's Investors Service. At heart are often contradictory policy objectives: Even as China tries to cut steel production capacity, its stimulus policies boost demand for steel, leaving some companies struggling.

AO Hardware Ltd., said the cost of steel used to make its shelves, boxes and kitchen accessories have increased 30% in recent months. After the company based in the southern factory hub of Guangzhou increased prices on its wares, sales fell 10% and it is having difficulty getting orders, said Wang Pingchun, AO's general manager. "Maybe the government is well intentioned, but we're the ones paying for it," he added.