Caixin View: Can Consumers Deliver in the Year of the Pig
* Lunar New Year festivities continue trend of slowing growth in consumer spending
* Year gets off to a bad start, but consumption-friendly tax cuts have yet to kick in and could provide a boost later in the year
Consumption has been put front and center of China’s economic performance this year and all eyes this week are on how hundreds of millions of Chinese people ate, traveled, and shopped their way into the Year of the Pig. The seven-day Lunar New Year public holiday (which ran from Feb. 4 to Feb. 10 this year) is one of the country’s two so-called “Golden Week” vacations that are supposed to prompt a splurge of spending.
Amid slowing economic growth, trade war woes, and government efforts to shore up consumption to boost domestic demand, it’s tempting to use this festive data as a health check on the economy, a test of consumer sentiment and a sign of what’s in store for the rest of 2019. However, for reasons outlined below, the numbers do need to be treated with caution and shouldn’t necessarily be taken as a gauge for the rest of the year.
First, the numbers themselves. Figures released so far, mainly by the government, don’t paint an optimistic picture for the economy. They show a continuation of the pattern of slowing growth in traditional consumption that we’ve seen over at least the past two years. The Ministry of Commerce estimated that retail and catering sales were more than 1 trillion yuan ($147.3 billion) during the festive week, up 8.5% from last year’s holiday period — but that was down from 10.2% growth in 2018 and was the weakest increase since at least 2011, when sales rose 19% year-on-year. In the calendar year 2018, overall retail sales rose 9%, the slowest pace since 2003. Box office receipts over the holiday were basically flat compared with last year, and down from a whopping 68% surge last year, according to data provider Dengta Research. Ticket sales fell in volume terms, down 10%, while the average price of tickets increased. A lukewarm Lunar New Year performance will matter more for this industry, which received 9.5% of its annual revenue over this single week last year, according to CICC Equity Research.
This year’s travel data don’t offer much solace either. The Ministry of Culture and Tourism estimated 415 million domestic trips were made during last week’s holiday, a 7.6% increase over last year, but that was down from a 12.1% increase in 2018, and marked the third consecutive year of slowing growth. Tourism revenue shows a similar pattern, also slowing for the third year in a row. Official forecasts (from the National Development and Reform Commission) of the number of trips to be made over the entire 40-day festive period — from Jan. 21 to March 1 — also expect a much slimmer increase, of just 0.6%. We think the disparity reflects an increasing proportion of trips this year being made over the holiday week itself, rather than in the periods before and after it, but even over the peak Sunday return-travel period, rail trips rose by just 3.3% compared with last year’s peak, according to data from China Railway Corp., which runs the train network.
Even so, the tepid numbers reflect the weakening pattern of domestic travel that started in 2016 — data from the National Bureau of Statistics show that in 2018 the number of journeys fell by 3.1% from 2017, with trips by road falling 6.3%.
But we are wary of extrapolating too much from the numbers. Activities over the Lunar New Year, whose dates change every year, are a deeply seasonal phenomena, and while they may offer some insights into how consumers are feeling, a key factor determining spending this year will be growth in disposable income. This will be shaped by a range of factors — such as fiscal measures, the jobs market, property prices and interest rates.
The State Council raised tax-free monthly income threshold to 5,000 a month from 3,500 a month in October, but new tax deductions for spending on items including education and medical expenses, and old-age care only came into effect on Jan. 1 so consumers have yet to feel the benefits. There are other tax cuts in the pipeline — earlier in February, the Ministry of Finance said it would introduce tax breaks for small businesses set up by new graduates and low-income workers. In late January, the government announced incentives to support sales of products such as cars, 5G technology and home appliances.
There are also questions about how well the official data capture changing consumption patterns — the traditional spending focus on food and drink is giving way gradually to spending on experiences and leisure and it’s difficult for the government to get this data, especially as so many of the services are provided by the private sector.
E-commerce giant JD.com Inc., for instance, reported that over the Lunar New Year public holiday period its sales increased by 42.7% compared with those made over the previous year’s holiday. Big events like Alibaba’s Singles Day shopping bonanza, that takes place every November, are also contributing to a change in spending patterns. Alibaba’s gross merchandise volume, a figure that counts the revenue of total orders transacted online, hit a record 213.5 billion yuan during the extravaganza last year.
The domestic travel numbers may also reflect a change in how people are spending the Lunar New Year holiday — anecdotal evidence suggests many younger families are shunning the long trek home from big cities to visit parents.
Given the size of China’s economy, it’s inevitable that some of the eye-popping growth numbers seen over the past two decades are coming back down to earth. The market has also matured for a range of goods such as cars, smartphones and household appliances, and ownership is now extremely high, which means low growth for these categories is the new normal. So although Lunar New Year spending hasn’t got the economy off to a good start for 2019, it’s too early to tell whether consumers will remain in hibernation for the rest of the year.
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