THE BRIEF: Chinese consumer languishing or recovering, Willingness to save remains high, China in a Balance Sheet Recession
Trying to make sense of things
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Today we discuss whether China’s consumer is languishing or recovering. We lean towards languishing, but see gradual improvement ahead, though there will be no quick moves without direct stimulus to households. Throughout the post we lean on PBOC’s Q2 survey reports to show a languishing consumer, a persistent willingness to save, and a decelerating loan demand across all sectors with real estate loan demand contracting.
Premier Li met with a symposium with experts Thursday and echoed recent economists’ views that time is short to “do something” to help the economy (see last Brief), but Li didn’t give any specifics, saying policies will be released soon.
“We should focus on implementing a ‘combination of punches’ in policymaking, centred around stable growth, employment and risk prevention,” Li was quoted by the official Xinhua news agency as saying.
He also called for the prompt implementation of targeted, comprehensive and concerted policy measures, as China is currently at a “critical juncture” of economic recovery and industrial upgrading, with a complex intertwining of structural issues and cyclical contradictions. - SCMP
Fingers crossed this set of policies has better results.
One of the great mistakes is to judge policies and programs by their intentions rather than their results. —MILTON FRIEDMAN
I. Chinese consumer languishing or recovering?
We’re getting this question often these days. Many were expecting a surge in revenge spending after China emerged from lockdowns. We showed in a Jan 10 Brief (link below) that high household deposits were mainly driven by declining aggregate home sales, meaning people were selling homes and not buying another one. Remember, in China, homes are treated as savings accounts (with a history of price appreciation!).
THE BRIEF: What's behind high household net deposits, Consumer confidence, Business conditions, PBOC urban depositor survey
In conversations with readers the past 2 weeks, we explained the dire conditions Chinese households faced during the pandemic. The pushback is that unemployment never got very high. That’s correct, and was the goal of the initial policy response. The govt incentivized businesses to retain employees by giving them tax breaks for doing so. (Definitions of employment are too loose, e.g. one hour a week counts as working.) Although not as bad a losing a job, during the pandemic many employees were asked to accept salary cuts (usually along with management). Prolonged reduced salaries takes a toll on confidence. While we don’t have exact numbers, the PBOC Urban Depositor survey can shed some light.
The PBOC survey provides the percent of respondents who said their incomes rose, stayed roughly the same or declined. Luckily, in Q1’20, when the pandemic hit, they started breaking out all three categories (we estimated the others, ask if you’d like to see our method). Notice the spikes around major lockdowns in the chart below. “Rise in incomes” has not recovered to pre-pandemic levels, which suggests to us many in China still have reduced incomes from the pandemic/lockdowns.
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