How far can 'revenge spending' consumers carry China's economic rebound?

It was an emotional affair for hundreds of millions of Chinese who travelled back to their hometowns, flew to popular tourist destinations or piled into shopping malls during the country’s long Lunar New Year holiday period, which began in late January. For some, this marked their first opportunity to travel in three years after pandemic related restrictions were finally lifted. 

In some ways, the economic impact has been immediate. Tourism revenue during the Lunar New Year holiday jumped to 375.8 billion renminbi (US$55.2 billion, as of Feb. 13), about 73 per cent of such sales during a similar period in 2019. Box office sales were up 11.89 per cent from last year's Lunar New Year holiday. And China’s consumers are just warming up.

After effectively shelving ‘zero-Covid’ in December, policymakers quickly pivoted toward boosting growth and prioritising consumption. Just as pent-up consumer demand formed a large tailwind for the US and the Eurozone after their earlier lockdowns, it will play an important role in the post-Covid recovery in China - making this consumer-driven rebound an uncharacteristic one for an economy that has historically relied on government-backed spending, investment and goods exports to stimulate growth. 

Trillions in new savings 

For the potential scale of this ‘revenge spending’ demand, consider the huge amount of savings residents hoarded last year. Chinese households added a record 17.8 trillion renminbi (US$2.6 trillion, as of Feb. 13) to their bank deposits in 2022, up 80 per cent from a year earlier, according to data from the People’s Bank of China. As the winter’s sharp reopening wave of Covid infections recedes, life is gradually going back to normal. Following the holiday spending splurge, we expect to see a further rebound in categories such as home appliances, furniture and food & beverage. 

Some home buyers may return to bargain hunt in the battered housing market. The government has unveiled a sweeping package of measures to aid property financing since November. Home buyers’ sentiment should improve as a result. Given the importance of the property sector to the economy, we expect the government has more room to stimulate the housing market where it sees a need to stabilise prices. 

Mind the speed bumps

The road to recovery will be bumpy. With the US and Europe facing recession risks, overseas demand for Chinese products may weaken. And although China’s headline inflation has been benign to date, the current, rapid release of pent-up demand may push up consumer prices, especially in services. 
Notwithstanding these risks - and the recent rally in Chinese equities - the A-share market offers opportunities for long-term investors. Winners will be those high-quality companies with sustainable return on assets, stable financial performance, reliable management, and a healthy corporate culture - and some firms in the consumer-facing and construction materials sectors are well positioned to benefit from the ongoing economic recovery. 
After a long, harsh winter, here comes the spring.