China’s Consumers Extend Economic Rebound From Pandemic
Summary
- Gauge of country’s services sector hits its highest level in more than decade
A gauge of activity in China’s services sector reached its highest level in more than a decade in March, a sign that Chinese consumers are heading back to stores and restaurants, powering an economic recovery following the end of almost three years of strict Covid-19 controls.
The reading represents a promising signal for the global economy, which depends on Chinese consumers to prop up growth this year as their counterparts in the U.S. and Europe battle rising interest rates, high inflation and the prospect of a squeeze on lending following turmoil in the banking sector.
Highlighting those pressures, a similar barometer of activity this month in China’s manufacturing sector edged lower as Western demand for Chinese exports faded.
Though the initial signs are promising, economists are unsure how durable the recovery in Chinese consumption will be. Chinese households are emerging from the pandemic with bulging savings but weak housing and job markets as well as sluggish growth in incomes, raising doubts about whether consumption can take over from exports and government and real-estate investments as the engines of Chinese growth.
“There is no doubting the strength of the rebound in the economy," said Aaditya Mattoo, chief economist for East Asia and the Pacific at the World Bank, which on Friday raised its growth forecast for China in 2023 to 5.1%—from 4.5% in October—before Beijing ditched its zero-tolerance policy toward Covid-19.
Economists say a lasting rebalancing of the economy toward consumption will require policy makers to take steps to boost household incomes.
“The more interesting question is how China chooses to grow, and not just how much growth will be in the short term," Mr. Mattoo said.
China’s official purchasing managers index for nonmanufacturing sectors, which include services and construction, rose in March to 58.2 from 56.3 in February, its highest level since May 2011. A subindex focused just on the services sector reached 56.9, its highest level since March 2012.
China’s PMI for the manufacturing sector declined to 51.9 in March from 52.6 in February, according to figures published Friday by China’s National Bureau of Statistics. Still, the index remained comfortably above the 50 mark that separates an expansion from contraction, and beat the 51.3 forecast made by economists polled by The Wall Street Journal.
Separately, a private indicator of new-home sales showed a second consecutive monthly gain in March, another sign that the country’s battered housing market is starting to recover after a protracted slump. Sales at the 100 largest real-estate developers in China rose 29% from the same month a year ago to the equivalent of $96.2 billion, according to China Real Estate Information Corp., an industry data provider. The March sales were also 42% higher than February’s levels.
The indicators suggest China’s recovery continued through March as households and businesses adjusted to life after almost three years of a Covid-19 controls that relied on mass lockdowns and frequent testing to crush the smallest virus outbreaks.
The strategy worked well during the first years of the pandemic but was tested by more transmissible strains of Covid-19 last year. Buffeted by repeated lockdowns, China’s economy expanded 3% in 2022, one of its weakest performances in decades.
The government has this year set a growth target of around 5%, which most economists expect it to hit, especially when compared with the weakness in growth last year. Chinese Premier Li Qiang said at an economic forum Thursday that the economy was showing “a positive recovery trend," which the government will seek to sustain.
Siew Loong Wong, head of Asia-Pacific at global logistics firm Kuehne+Nagel International AG, said subdued global demand for Chinese exports is weighing on Chinese imports of things such as components and raw materials. But he said he is optimistic about the prospects for recovery, given how early in the reopening process the country is.
“I think where they are is OK. I don’t think it’s all doom and gloom," he said.
Still, for many economists, a range of indicators suggest keeping up the current momentum won’t be straightforward. Chinese families continue to sock away savings and are rushing to repay mortgage loans. Households’ bank deposits are climbing, rising by 6.2 trillion yuan, the equivalent of $903 billion, in January alone, a new monthly record.
Private businesses appear reluctant to hire and invest, reflecting the scars of Covid-19 and regulatory clampdowns on sectors including tech and education. During the first two months of the year, private investment in machinery, buildings and other fixed assets grew by 0.8% from a year earlier, much weaker than the 5.5% growth in overall fixed-asset investment.
The real test for the Chinese economy will come in the second and third quarters, Ting Lu, chief China economist at Nomura Holdings in Hong Kong, said in a note to clients. Right now, the economy might have reached a sweet spot, he said, but a darkening backdrop for global growth means “this may not last long," he said.
