HONG KONG: China’s V-shaped recovery looks squiggly on closer examination. Budweiser, KFC and Rio Tinto pointed to reviving sales in beer, fried chicken and steel in their latest quarterly earnings reports. Official data shows industrial profitability is improving too, and domestic tourism is rebounding. But the revival is unevenly distributed. As pent-up demand gets sated, spending might slow again.
It’s unsurprising that the world’s second-largest economy is recovering from the pandemic first. Draconian measures to control Covid-19’s resurgence in Beijing and some other cities have proved effective so far. Meanwhile, Beijing has judiciously lowered borrowing costs and printed plenty of money, while state-controlled banks shovelled out a record $1.7 trillion in local currency loans in the first six months of the year.
That has delivered a selective boost to consumer confidence. In addition to the upbeat earnings results from Budweiser and KFC operator Yum China, domestic air travel popped 54% in May from the prior month, and has now recovered to around 70% of last year’s level. Local visitors have taken their masks off and flooded into poor but scenic provinces like Yunnan. At the same time infrastructure stimulus plans have juiced orders for commodities like iron ore, which has benefited miner Rio. Equity markets are up, the currency is stable, and 10-year sovereign bonds are yielding nearly 3%. What’s not to like?
Yet many of the factors underpinning this revival are temporary. “Revenge consumption”, which refers to purchases people tend to make after being temporarily restrained from shopping, appears to have produced a temporary bump in purchases of items like cars - which is already flattening out.
Yum China reports vastly divergent performance between regions; real estate investment has concentrated in top-tier cities like Shenzhen. Low-wage sectors like retail, hotels and restaurants are still contracting - all major employers - so even as the overall services industry grows, June data shows it is still shedding jobs. The national household savings rate remains elevated, and trade is tepid.
So far, China’s rising tide has mostly lifted wealthier boats. If the recovery doesn’t find a broader base soon, momentum may ebb.
- By Pete Sweeney