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China Retail Sales Surpass October Forecasts Despite Deepening Real Estate Slump

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China posted stronger-than-expected growth in retail sales for October, signaling early success from its recent stimulus measures, even as its real estate sector continued to struggle.

Economic Indicators at a Glance

  • Retail Sales: Up 4.8% year-on-year, surpassing the 3.8% forecast and improving from 3.2% in September.
  • Industrial Production: Increased by 5.3% annually, slightly below the expected 5.6%.
  • Fixed Asset Investment: Rose 3.4% year-to-date, missing the 3.5% estimate.
  • Real Estate Investment: Plummeted 10.3% year-to-date, marking the sharpest drop since August 2021’s 10.9% decline.
  • Unemployment Rate: Dropped to 5%, an improvement from 5.1% in September, with youth unemployment also showing signs of recovery.

Stimulus Impact and Sectoral Insights

  1. Retail Recovery:
    • October’s retail sales highlight improved consumer sentiment, bolstered by October’s Singles’ Day shopping festival. Analysts noted robust growth in sectors like e-commerce and consumer electronics.
  2. Real Estate Woes:
    • The property sector’s decline deepened, with new property sales showing narrower declines but remaining weak.
    • Authorities reiterated commitments to stabilize the sector, projecting recovery within 12–18 months.
  3. Manufacturing and Infrastructure:
    • Investments in manufacturing and infrastructure picked up slightly, reflecting a shift toward targeted economic support for foundational sectors.

Policy Landscape

China’s government has rolled out aggressive stimulus measures since September to address its economic challenges:

  • Monetary Policy: Interest rate cuts by the central bank and extended real estate support.
  • Fiscal Measures: A five-year, 10 trillion yuan ($1.4 trillion) program to alleviate local government debt, with hints of further support in 2024.
  • Consumer Incentives: Limited direct measures, but trade-in programs for cars and home appliances have helped bolster sales.

The National Bureau of Statistics emphasized the need for intensified policy implementation to meet the country’s annual growth target of around 5%.

Broader Trends and Challenges

  • Exports Surge, Imports Lag: October saw the fastest export growth in over a year, while imports remained subdued, reflecting weak domestic demand.
  • Inflation: The core consumer price index rose 0.2% year-on-year, slightly better than September’s 0.1%.
  • Golden Week Insights: Spending trends during the holiday remained cautious, though better-than-expected Singles’ Day sales hint at potential resilience in consumer activity.

Economic Outlook

China’s gross domestic product grew by 4.8% in the first three quarters, and authorities remain focused on achieving the 5% growth target for the year. Analysts remain cautiously optimistic, with signs of stabilization in certain sectors tempered by persistent domestic and international headwinds.

 

China’s Economic Struggles Impact Golden Week Holiday Spending

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China is bracing for a bustling Golden Week travel season, with the Ministry of Transport estimating 1.94 billion inter-city trips during the National Day holiday. This figure slightly surpasses last year’s total, indicating a potential recovery in domestic travel. However, persistent economic challenges, including a real estate downturn and rising unemployment, are expected to dampen consumer spending during this traditionally high-spending period.

Shaun Rein, founder and managing director of China Market Research Group, notes that while travel volume might surpass 2019 levels, spending per traveler is expected to decline. Consumers are adopting a more cautious approach, cutting back on expenditures amid economic uncertainty. Rein attributes this frugality to concerns about unstable income levels, with many Chinese opting to save until they see consistent economic improvements.

Data from Trip.com supports this trend, with both hotel and flight prices falling below last year’s levels. Prices for domestic and international flights have dropped compared to 2022, reflecting a broader trend of travelers seeking more budget-friendly options. The National Railway Administration expects 175 million rail trips during the Golden Week, as more people turn to lower-cost transportation. This year’s rail passenger volume is predicted to peak at over 21 million on Tuesday, surpassing the previous record of 20.7 million set during the Labor Day holiday in May.

Despite lower spending per traveler, there are signs of a modest uptick in tourism overall. Alicia Garcia Herrero, chief economist at Natixis, suggests that this year’s slight rise in tourism spending should be viewed in the context of last year’s relatively low base. During last year’s Golden Week, domestic tourism revenue reached 753 billion yuan ($107.37 billion), a 1.5% increase from 2019. Although total spending is on the rise, frugality remains a theme for many travelers.

China’s tourism sector has seen some recovery in 2023. The Ministry of Culture and Tourism reports a 16.8% increase in domestic trips over the first three quarters of the year, with 4.29 billion trips taken. Tourism revenue has also risen by 17.1%, reaching 4.32 trillion yuan ($615.6 billion). Inbound passenger trips have grown by 55.4%, totaling 95 million for the year to date.

While these numbers reflect gradual improvement, the post-pandemic recovery has been uneven. For example, during the May Labor Day holiday, China saw more trips and higher total spending than in 2019, but the average spending per traveler remained lower than pre-pandemic levels. The effects of the COVID-19 pandemic, combined with broader economic uncertainty, continue to influence consumer behavior.

To address these economic challenges, Chinese officials recently introduced new stimulus measures, including a 50-basis-point reduction in banks’ reserve requirement ratio, aimed at boosting liquidity. Shaun Rein anticipates that these measures could lead to a significant rebound in consumer spending during the upcoming Chinese New Year once the latest round of economic support is fully absorbed.

China’s Local Government Debt Problems Are a Hidden Drag on Economic Growth

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China’s persistent consumption slowdown is increasingly linked to the country’s real estate slump, which has deep financial ties to local governments and their growing debt. Over the past two decades, much of Chinese household wealth was funneled into real estate, but since Beijing began cracking down on developers’ high reliance on debt in 2020, property values have fallen. This has, in turn, cut into local government revenues, especially from land sales—a crucial source of funding.

According to analysts at S&P Global Ratings, local government finances may take three to five years to recover, but delays in revenue recovery could exacerbate the already growing debt levels. Wenyin Huang, director at S&P Global Ratings, highlighted how macroeconomic challenges continue to weaken the revenue-generating capacity of local governments, particularly when it comes to taxes and land sales. Over the last two or three years, the drop in land sale revenues and tax cuts dating back to 2018 have further reduced operating revenue by an average of 10% across China.

Local governments are scrambling to reclaim lost revenue, putting additional strain on businesses already hesitant to expand or raise wages amid ongoing economic uncertainty. This pressure has led to an increase in back-tax collection efforts, with some companies reporting notices to repay taxes for operations dating back decades. These unexpected financial demands have further damaged fragile business confidence, with the CKGSB Business Conditions Index reflecting a contraction in August.

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In an effort to diversify revenue streams, certain provinces such as Jiangsu, Shandong, Shanghai, and Zhejiang have seen non-tax revenue growth exceeding 15% in 2024. However, this shift has done little to alleviate the underlying challenges. Camille Boullenois, an associate director at Rhodium Group, noted that the aggressive tax collection “shows how desperate [local governments] are to find new sources of revenue.”

The Chinese government has denied any widespread or targeted tax inspections but acknowledged that local governments have issued notices in compliance with existing laws. Despite these claims, the strain on local government budgets remains evident, as essential services like education and civil servant salaries cannot be cut, leaving limited room to reduce spending.

Efforts to spur growth by pivoting toward consumption-based models have struggled to take hold. Analysts have pointed out that the investment-led approach is not delivering the desired nominal GDP growth, which is contributing to higher debt ratios. Since 2021, China’s debt-to-GDP ratio has risen by 30 percentage points, reaching 310% in the second quarter of 2024, and is projected to rise further by year-end. Growth, meanwhile, is expected to lag behind the official target, with GDP projected to rise by just 4.5% in the third quarter, shy of the government’s 5% goal.

Local government financing vehicles (LGFVs), which have taken on substantial debt for public infrastructure projects, now pose a significant risk to the banking sector. Experts like Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, believe LGFVs are an even greater risk than the real estate sector, describing them as a “grey rhino” — a metaphor for high-probability, high-impact risks that are being ignored. Chinese banks are now more exposed to LGFV loans than to real estate developers, creating a precarious situation for the financial system.

S&P Global Ratings’ Laura Li warned that while the government is trying to manage liquidity issues to maintain stability, there are no quick fixes to the mounting debt problem. The central and local governments simply do not have enough resources to address the issue all at once, leaving the country’s economic recovery and long-term growth prospects under threat.