China's consumer spending faces lingering challenges despite May surge

China’s consumer spending continues to struggle as the country’s economic recovery remains slow and uncertain. Despite a brief uptick in retail sales for May, analysts warn that the underlying issues driving subdued demand, such as stagnant income growth, a lack of social safety nets, and shifting consumer preferences, are unlikely to subside soon.

In recent months, China has witnessed four consecutive months of declining consumer prices, coupled with persistently low consumer confidence.

CNBC reported that disposable income growth has halved since the pandemic, now growing at a mere 5 per cent annually, according to Jeremy Stevens, an Asia economist at Standard Bank. This stagnation in income, combined with high youth unemployment and a struggling real estate market, continues to dampen consumer sentiment.

A survey conducted by the People’s Bank of China in the third quarter of 2024 found that 64 per cent of Chinese households would rather save than spend, a trend that has been persistent since late 2023. This preference for saving, exacerbated by a limited social safety net, has made it difficult for the government to spur long-term consumer spending.

May retail sales boosted by subsidies and promotions

Despite these ongoing challenges, China’s retail sector experienced a welcome boost in May, with sales growing 6.4 per cent year-on-year, sharply surpassing analysts' expectations of a 5 per cent increase.

This surge was partly attributed to the government’s ongoing consumer goods trade-in programme, which incentivised spending, along with a surge in online shopping during the “618” e-commerce event and a rise in foreign tourists following the expansion of China’s visa-free entry list.

While the spike in retail sales was encouraging, experts caution that it may not signal a sustainable recovery. Zhiwei Zhang, President and Chief Economist at Pinpoint Asset Management, noted that the rising sales were a short-term benefit, with falling property prices potentially hurting long-term consumer confidence.

According to the National Bureau of Statistics (NBS), property investment continues to contract, dragging down overall economic momentum.

China's labour market struggles

The weak consumer sentiment is closely linked to ongoing challenges in the Chinese labour market. Unemployment among young people aged 16 to 24 stood at a record 15.8 per cent in April, while the official urban unemployment rate hovered around 5 per cent.

These figures highlight the lack of wage growth and the challenges posed by an uncertain job market, especially in sectors impacted by US tariffs.

Additionally, a recent survey showed that over 60 per cent of respondents favoured saving over spending, indicating that uncertainty about the future and concerns over financial stability continue to weigh heavily on consumers’ minds.

Many Chinese citizens also face high out-of-pocket costs for healthcare, education, and retirement, contributing to their reluctance to spend.

Government's efforts to spur consumption

In response to these challenges, Chinese authorities have introduced several measures aimed at stimulating consumption. These include boosting subsidies for consumer goods and expanding the availability of public holidays and services sector consumption vouchers.

However, unlike the mass cash handouts in the US and Hong Kong post-pandemic, China has refrained from large-scale financial stimulus, opting instead for more targeted support.

Analysts, however, warn that these efforts may not be enough to drive sustained recovery. The consumer sector remains under pressure, with deflationary trends continuing in consumer prices and deeper declines in factory-gate prices.

Moreover, many local governments have already paused their consumer goods trade-in programmes as initial subsidies have been exhausted.

A short-term recovery or a long-term struggle?

Despite the May sales surge, the outlook for China’s consumer market remains uncertain. While export growth has remained resilient, particularly to Southeast Asia, the EU, and Africa, domestic demand continues to lag.

The ongoing property slump, tightening job market, and economic uncertainty suggest that China may face a prolonged period of weak consumer spending.

Some analysts are hopeful that additional fiscal measures may come in the latter half of 2024 if growth continues to falter. However, without stronger demand-side stimulus, many predict that any recovery in consumer spending will be short-lived.

China’s economic trajectory will ultimately depend on how effectively it addresses the persistent structural challenges in its labour market and real estate sector. For now, though, the country’s consumer sector faces a challenging road ahead.