Chinese consumers on a sudden halt

Teaser: The Chinese retail sales was below expectations in October, which of course gives reason to consider China’s economy once more.

On the famous Singles Day, the 11th November, Chinese company Alibaba sold goods for 213.5 billion renminbi (USD 30.5 billion). These kinds of numbers are quite fascinating and when one considers that the turnover leads to one billion shipments afterwards, it really underscores the volume. On the question whether an increase in the turnover of 27 pct. compared to Singles Day in 2017 expresses a sharp increase in private consumption, the answer is less exciting – it is actually a no.

Almost ironically, Alibaba's CEO Jack Ma on 2nd November, announced that the company lowered its forecast result for the current financial year, ending March 31st. Bad times can be the excuse for many developments, but nevertheless, it is precisely the current feeling of uncertainty among the Chinese consumers which Alibaba refers to. In line with this, I argue that there have been different indications of the mentioned uneasiness among Chinese consumers, though it is still in a market with high growth rates.

The developments in retail sales are difficult to follow 100 pct. precisely, due to the huge shift in consumer behaviour the past years. Retail turnover via online platforms now accounts for around 28 pct. of the total retail sales in China. As graphic one shows, Chinese consumers today spend almost 20 pct. of their income on online purchases, which is a world record. Looking at the absolute amount consumed, Chinese consumers are in fifth place in the world, thus in-line with France and Australia.

A part of the success of retail e-commerce companies like Alibaba is the movement from traditional store sales to consumption via a smartphone. For several years, the overall retail sales in China had a growth rate of 10 pct. annually, which is a high number. But part of the story is that private consumption origins from an extremely low level (very low historically base) when measured in absolute renminbi. Therefore, the growth rate even after 30 years growth should remain high, but in October, it was a downside surprise (graphic two).

As mentioned, I believe that for some time now, there has been a certain reluctance among Chinese consumers. Though one must remember that it just means a slightly lower growth from a high level. Still, it’s noteworthy that the October retails sales actually lacked half a percentage point in growth.

Among several areas, the car sales in China have long been pointing in a downwards direction. This year, the car sales will even show a negative year-on-year development for the first time in almost 30 years. There are several reasons behind the drop, such as government subsidies that have faded out, though I still consider a weaker consumer desire as the main reason.

It may seem like a Chinese problem, but investors globally could be interested in the development. China is by far the world's largest car market, with 29 million sold cars last year, of which 62 pct. were foreign cars - in comparison to the 19 million cars sold in the United States in 2017.

To boost private consumption and economic growth, the Chinese government spent a long time to get the recent tax reform implemented, which is intended to support corporations and the middle-class households. The tax reform reduces income tax by up to eight percentage points for middle class household incomes, which is considerably significant, compared to different tax reforms around the world.

If consumption truly jumps due to the higher disposable income is a good question. I am quite excited to observe the shopper’s mood during the vacation week around Chinese Lunar New Year in February – I expect this to be the real test of the mood.

Perhaps even more tax cuts are on the way to companies, and possibly private households. To follow this development, insiders will keep an eye on a meeting among Chinese top politicians and officials in the Central Economic Work Conference, which is a closed meeting that will probably take place in December.

When assessing the Chinese economy, it’s not unusual to observe contradictory developments or imbalances in different areas of the economy. These years, it applies to virtually all economies around the world, but in most periods over the last 30 years, it has been the case for China's economy. It expresses the ongoing “Chinese dilemma” that faces investors as some developments in China seem worrisome, but in 12 months, everything has grown bigger, and it makes sense to participate in the growth.

Not even during the next 30 years would I expect Chinas economy to offer a perfect outlook with all numbers in balance. The ongoing assessments of what the important developments are, currently remains. Right now, I judge the developments in the private consumption as particularly important, I would therefore pay extra attention to the consumers.

Increased private consumption is a key element in growing the domestic private demand engine, but it should also further reduce Chinas dependence on exports. The main question is not whether private consumption rises, but if it is enough to keep China's GDP growth at around 6.5%? I argue that it is currently not the case.

Very wise, China’s government tries to reduce the debt pile in the economy, though that equals to economic deleverage, which cannot avoid affecting the GDP growth negatively. The political counter reaction is for example to lower the income tax rates to strengthen the shopper’s appetite for spending money, but as mentioned, we have for some time felt a kind of reluctance among consumers, as evident with the car sales.

This is one reason why for a period now, I have argued that the Chinese GDP growth may fall to six pct. faster than majority of economists expect.

The financial market always reacts very negatively to weak messages from China, which I incorporate in my assessments. Though when considering the stock markets, my opinion is that many negative news from China are already priced in, maybe even too much. Further, must the “Chinese dilemma” be factored in, meaning that in 12 months, all numbers are larger, and profitable companies have grown even bigger – so I stay in the market….

Based on the Code of Conduct at Lundgreen's Capital, when writing a post or a column, we should mention if the company itself or associated legal entities own shares in the companies mentioned. This is the case with Alibaba. However, we confirm that this does not influence the contents or conclusions of the column.

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