During China Lunar New Year Holiday, which took place from January 21 to 27, tourists flocked to the sprawling Taihao Mausoleum in Henan province. Many enjoyed banging a statue of Qin Hui, a scheming Song Dynasty official notorious for tricking a military hero. A visitor got carried away and hit the statue with the lid of an incense burner. Spirits are high after Qin’s villainy starred in a new movie, Full River Red, which topped the box office over the holiday season.
This enthusiastic cinema-going, sightseeing and statue-slapping testament to a surprisingly rapid rebound in consumption in the world’s second largest economy. The mausoleum said it received 300,000 visitors over the festive period, the most in three years. Box office receipts were not only better than last year, they were also higher than the year before Covid-19. China’s population, topic until recently for mass screeningShe is now romping around massively on the screens.
The recovery is coming sooner than expected because the virus is spreading faster. Since China hastily abandoned its zero-Covid regime, infections appear to have passed remarkably quickly. State epidemiologists estimate that at least 80% of the population already has the disease. According to official information, inpatient hospital numbers peaked on January 5. A second wave of infections was expected after holiday travel spread the disease from towns to villages. But the virus has defeated the festive rush. The much-dreaded second wave seems to have merged with the first, says Airfinity, a life sciences data company.
Although the death toll from all these infections is unknown, the economic fallout is becoming increasingly clear. As people have contracted and recovered from the virus, China’s service economy is coming back to life. A non-manufacturing activity index based on monthly surveys of purchasing managers rose to 54.4 in January from 41.6 in December, the second-biggest jump on record. Bank of America’s Xiaoqing Pi and Helen Qiao note that activity in “pandemic-hit” service sectors such as retail, lodging and food service has surged.
On Meituan, an e-commerce platform, some restaurants have waiting lists of 1,000 tables. People used to queue PCR Trials are now waiting to pray at popular temples. In Hangzhou, capital of Zhejiang province, people gathered in front of Linshun Temple at 4 a.m. to light incense sticks dedicated to the god of wealth. Others who reached the top of Hunan province’s spectacular Tianmen Mountain, famous for its dizzying glass walkways, had to wait until 9 p.m. to take the cable car back down, according to the report National Business Dailya state newspaper.
Can this frenetic pace be sustained? Optimists point out that households are unusually liquid. Their bank deposits now exceed 120 trillion yuan ($18 trillion), more than 100% from a year earlier bip, and 13 trillion yuan more than might have been expected given pre-pandemic trends, according to Citigroup, a bank. These deposits could provide ammunition for a bout of “revenge spending.”
However, the ammunition can be set aside for other uses. Much of it is cash that nervous households kept in the bank rather than use to buy property or invest in a mutual fund. They are unlikely to waste it on goods and services now. More likely, according to Citigroup, is a bout of “revenge risk” as households gain confidence to buy bonds and stocks, which are less secure but potentially more rewarding than a bank deposit. This would lift asset prices and give the housing market a much-needed boost.
So perhaps a more accurate way to gauge the upcoming spending boom is to look at the gap between household income and consumer spending. In the three years before the pandemic, households saved 30% of their disposable income. They saved 33% during the pandemic. The cumulative result of these additional savings is about 4.9 trillion yuan. If consumers were to add this to their spending this year, it would increase their consumption by 14% (before adjusting for inflation).
The exact size of the Spree will ultimately depend on general economic conditions. Property prices have fallen and the labor market is weak, with youth unemployment still above 16%. But China’s labor market has bounced back quickly from previous setbacks, and unemployed youth make up only about 1% of the urban labor force. With any luck, a few extra spends will lead to more sales and more hires, which in turn will motivate extra spending. All of this means that consumption could account for the lion’s share of growth in China this year: nearly 80% if you add government spending, according to Citigroup. This would be the highest proportion in more than two decades.
China’s splendor will make a welcome contribution to global growth. According to the IMFAccording to forecasts published on January 30, the country’s economy will grow by 5.2% this year, accounting for two-fifths of the expansion of the world economy. Together, America and the eurozone will contribute less than a fifth.
A recent study by economists at the US Federal Reserve puts it in a nutshell with its title: “What happens in China does not stay in China”. Their estimates point to a politically induced expansion in China bip of 1% adds about 0.25% to the rest of the world bip after a year or two. The authors do not examine spillover effects from China’s reopening. But their results give an indication of the possible consequences. If China’s reopening lifts the domestic growth rate to 5-6% from 3% this year, the spillovers could be 0.5-0.75% to the rest of the world bipor about $400 to $600 billion on an annualized basis.
However, an increase in growth would not be a pure good. Central banks still want to curb inflation. If higher Chinese demand amplifies price pressures, policymakers may feel compelled to rein in their economy by raising interest rates or delaying cuts. Fed Vice Chair Lael Brainard has noted that China’s exit from the zero-Covid crisis has uncertain implications for global demand and inflation, particularly in commodities. Christine Lagarde, head of the European Central Bank, has warned that she will increase “inflationary pressures” because China will use more energy. According to Goldman Sachs, another bank, the reopening could add $15 to $21 to a barrel of Brent crude oil, which is now trading at around $80.
After the 1997 Asian financial crisis, the Chinese economy helped stabilize the region. After the global financial crisis a decade later, China’s growth helped stabilize the world. It will again make the largest single contribution to global growth this year. But while China’s contribution has historically come from capital spending, now consumption will take the lead. Chinese consumers have traditionally punched under their weight. This year they will hit harder. ■
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