In Depth: China’s Consumer Spending May Suffer ‘Long Covid’ Contraction, Economists Warn

Surely one of the most commonly asked questions by people in China and indeed all over the world is: when will the Covid-19 pandemic end and life finally return to normal? Unfortunately, the answer from experts appears increasingly that it remains some time off.

Indeed, just as medical researchers warn about new variants and the long-term symptoms for those infected by the virus — bleakly dubbed “long Covid” — economists are also saying that, despite the post-epidemic recovery in China, less spending by consumers and the knock-on economic impact may be around for the long haul.

An increasingly familiar cycle of new outbreaks of Covid-19 across the country, followed by tough lockdowns and other travel restrictions, has slowed the gathering pace of a post-pandemic recovery and entrenched a feeling of caution among China’s consumers, whose spending accounted for 38% of the nation’s GDP last year.

Another perhaps more insidious fallout from the pandemic is the exacerbation of existing long-term economic issues, such as slowing income growth and a widening income gap (link in Chinese), analysts at brokerage Guosheng Securities Co. Ltd. wrote in a note last week.

Kunjoe Qiao, a documentary film director in her early 30s living in Beijing, is a case in point. Since the epidemic first broke out last year, her income has shrunk, leading her to become more cautious about spending and to buy fewer things that she doesn’t really need. Nowadays she prefers cooking at home rather than eating out, because it is cheaper, not to mention safer.

“For me, this change will probably be long-term,” she told Caixin, adding she might never fully return to her spending habits prior to the pandemic, even after it ends.

One of the starkest examples of how Covid-19 is impacting consumers and may continue to do so into the future is the slowing growth in retail sales, an indicator comprised of spending by households, governments and businesses.

In August, retail sales rose 2.5% year-on-year, a sharp drop from 8.5% the previous month, and well below the median forecast of 6.6% in a Caixin survey (link in Chinese) of economists.

Some analysts have said this is short-term and can be attributed to the cycle of outbreaks of the more virulent delta variant since late July, which sparked strict containment measures across large swaths of China, once again disrupting economic activity and spurring many people to avoid travel, shopping and eating out.

A breakdown of August retail sales starkly shows the impact of the restrictions, with restaurant and catering spending shrinking 4.5% year-on-year (link in Chinese) after rising 14.3% in the previous month.

Government officials also view this as a short-term speed bump on the road to recovery.

“Those shocks were still temporary and regional, and generally controllable,” Chang Tiewei, an official at the National Development and Reform Commission, the top economic planning agency, said at a briefing (link in Chinese) last month. “Consumption will continue to recover with effective control of the outbreaks and further implementation of policies to promote it.”

However, there are more near-term signs that a slowdown in consumption is far from over, with disruption to spending in some sectors, such as the box office, stretching into China’s week-long National Day holiday, which started Oct. 1, a traditional “golden week” for shopping and travel.

Another sign that the pandemic’s impact on consumption may not be a short-term phenomenon is weakness in online spending, despite remaining strong in previous outbreaks, economists at investment bank China International Capital Corp. Ltd. (601995.SH) wrote in a note (link in Chinese) last month.

The two-year compound annual growth rate of online retail sales in August was 10.6%, 7.1 percentage points lower than that in July, they calculated.

This data is telling, as previous outbreaks usually suppressed offline consumer spending, while sending shoppers online. August’s weakness indicates that the consumption recovery lacked momentum. This could be attributed to incomes of some groups, such as the self-employed, migrant workers and offline service workers, likely being slashed repeatedly amid repeated flare-ups of Covid-19, they added.

The willingness to spend will weaken as household disposable income growth slows, economists at ICBC International Holdings Ltd. wrote in a recent opinion piece (link in Chinese). Official surveys also show that consumers became more unwilling to open their wallets when they had a less positive outlook for their future income.

In August, the gauge for consumers’ willingness to spend was the second-lowest in a year and that measuring their income prospects dropped to the lowest in 14 months, according to the National Bureau of Statistics (NBS).

Likewise, putting their money in banks in lieu of spending it remained popular, with a survey by the central bank (link in Chinese) showing that 49.4% of 20,000 urban residents in the second quarter were inclined to increase their savings. This was lower than its peak of 53% in the first quarter last year, but still higher than any pre-pandemic figure.

Economists have long called for measures to increase household incomes, especially for low- and middle-income families, to boost overall consumption.

“A shrinking income gap is the key to driving household consumption growth,” said a report (link in Chinese) by think tank the China Macroeconomy Forum. Indeed, policymakers have vowed to rein in the income gap between rich and poor as part of strategies to promote President Xi Jinping’s “common prosperity” vision of more fairly distributing wealth.

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As the pandemic’s continued sharp short-term disruptions appear set to continue, some are pointing to a shift in course by the government away from fighting repeated flare-ups of the virus to finding a way to live with it.

The government’s “zero-tolerance” Covid-19 strategy may be adjusted in the second half next year as it is not sustainable in the long term, which means the impact from lockdowns and restrictions on offline spending will gradually fade, Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd., told Caixin.

However, for young consumers stung by the profound impact the pandemic has had on their lives and earnings, the change in spending habits may be lasting.

Young people are becoming more cautious with their spending due to the uncertainties brought about by the pandemic, the ICBC International economists wrote.

“We believe that the consumption trends and habits will not end after the pandemic,” they wrote.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Lin Jinbing (jinbinglin@caixin.com)

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