Retail sales in China is expected to recover after the lifting of Covid-19 restrictions but is likely to be bumpier than those in many other major economies, said Fitch recently.
That recovery situation is due to the weak employment and income outlook, decreasing home prices, rising household leverage, and a lack of direct stimulus, the credit rating agency noted.
“Strong growth in personal deposits in 2022, however, may provide upside to our expectations,” Fitch said.
Retail sales in China improved after Covid-19 infections peaked in the major cities between late December 2022 and January 2023, following the removal of restrictions in early December, Fitch pointed out.
The swift turnaround from the trough is partly due to China reaching an infection peak faster than most other economies when they re-opened, according to the firm.
The surge in infections in China is reflected in the 1.8% year-on-year contraction in retail sales in December 2022, which led to a 0.2% decline for the full year, the firm added.
“We expect strong growth in retail sales of essential goods, such as food and beverages, despite a high base in 2022 from consumers stocking up for fear of lock-downs,” Fitch said in a statement.
However, the jump in medicine sales in December was likely temporary as consumers rushed to buy them due to the heightened infection risk and concerns about shortages, Fitch observed.
Consumption of non-essential goods will likely recover later, after consumer sentiment gradually improves, according to Fitch.
Products, such as apparel and cosmetics, that saw sluggish demand in 2022 amid mobility restrictions are likely to see stronger growth from a low base as demand returns, the firm added.
Other predictions about retail sales in China by Fitch
- Vehicle sales may not return to growth due to potential price competition in 2023 and front-loaded sales towards end-2022 before the expiration of policy stimulus, including the 50% purchase tax rebate for internal combustion-engine vehicles and subsidies for new-energy vehicles.
- Catering and offline shopping, which suffered the most from pandemic-related restrictions, to lead the recovery as they come off a low base and as more people head out for meals and shopping.
- This could benefit issuers such as Haidilao International Holding Ltd. (BBB-/Negative), Meituan (BBB-/Negative), and Golden Eagle Retail Group Limited (BB+/Stable), but the credit impact will also hinge on the companies’ strategies post re-opening.
- The consumption recovery is likely to be volatile due to dampened consumer sentiment, which is under pressure from shrinking household wealth, weak employment and income outlook, rising household leverage, and the risk of a resurgence in Covid-19 infections.
- Rising household indebtedness has also impaired Chinese consumers’ purchasing power.
- The residential leverage ratio rose rapidly to 62.4% in 3Q2022 from 55.3% in 3Q2019, according to the National Institution for Finance & Development, while consumers in other re-opened economies, such as those in the US and Europe, had been deleveraging since the 2008 global financial crisis.
- The absence of meaningful policy stimulus to boost domestic private consumption in China so far also contrasts with the strong stimulus packages in the initial recovery phase in many other major economies, which benefited retail sales.
- The Chinese government’s main focus has been on policy support to infrastructure investment to bolster the economy, which may not propel consumption directly.
Still, the high balance of excess savings might provide some potential for “catch-up” consumption and upside surprises in 2023 after economic activity normalises, Fitch said.
Personal deposits totalled CNY121 trillion at December 2022, up 17% from a year ago, according to the firm.
