Chinese consumer sentiment in May, as measured by the Westpac MNI China Consumer Sentiment Indicator, remained at the same five-year low reached in the previous month.
This is disappointing news given the actions the government has taken over the past six weeks to stimulate consumption. As exports and investments remain weak, China needs consumers to drive growth the way they have over the last year or so.
What are consumers worried about?
- Consumers are facing a slower pace of income growth than in prior years. For many, high double-digit annual income growth has slipped into the mid-single digits. Those in the public sector, government, and state-owned enterprises, are finding they are having to make contributions to their pension that outstrip any headline wage increases they supposedly enjoy.
- Those with children graduating from college are finding there is a considerable likelihood that their kids are graduating in debt, can’t find a job, and are moving back home.
- In some cities, especially in the northeast, the local economy is struggling badly as traditional capital-intensive industries struggle to renew themselves. The residence hukou system forces people who might otherwise look for jobs elsewhere to remain in their current city, while the weak local property market makes it nearly impossible for many to sell.
- Real interest rates remain pretty high, despite the recent rate cuts.
- Many feel that their personal job security is lower today than in the past.
On top of these concerns, three other factors stand out:
- Many of the middle class don’t need to spend much: they own their home, their car, and most large consumer durables.
- Many of the middle class avoid spending on services because they can’t find the quality they’re seeking.
- Many goods and services are getting cheaper – why not wait to buy them?
We should keep a close watch on the confidence of the Chinese consumer. It can tell us a lot about how consumption is likely to develop.