Is China’s consumption story over? Here’s what experts are saying

After a year of uneven and disappointing post-pandemic recovery in 2023, China’s consumer sentiment may finally start to improve this year.

Last year, the world looked to China’s grand reopening as the catalyst that could pull the global economy out of its pandemic slump, but those hopes were proven wrong as analysts warned the world’s second largest economy may not meet its own target of 5% growth for 2023.

For an economy that’s so heavily reliant on its manufacturing capabilities, market players are now looking toward the services and consumption sectors to propel China’s growth in 2024.

While a slowdown is somewhat inevitable given China’s uneven economic recovery, Goldman Sachs expects services consumption to show more resilience than goods.

Goldman predicted that China’s gross domestic product could grow 4.8% in 2024, led mostly by a rebound in service activity, which it sees growing at a much faster pace of 9.2% than manufacturing goods, which is expected to grow 6%.

The bounce in consumer activity, according to Goldman Sachs, will be led by leisure-related activities that include chain hotel operators, online travel agents and Macao casinos.

Stocks expected to benefit the most in the next 12 months include casino operators like H World and Galaxy, online travel firm like Trip.com and Tongcheng, and airlines like Spring Airlines, the U.S. investment bank said. Online gaming companies including FTG and NetEase, food delivery giant Meituan and tech giant Tencent, are also expected to get a boost.

Producer prices in China have been softening due to weakening consumer demand, which has contributed to negative consumer price readings.

Recent data showed China’s consumer prices fell the fastest in three years in November, down 0.5% from a year earlier and compared with October.

The country has been grappling with surging local government debt, a beleaguered property sector and waning domestic and international demand.

All that contributed to a ratings downgrade from Moody’s.

In December, the ratings agency slashed its outlook on China’s government credit ratings to negative from stable, expecting Beijing’s support and possible bailouts for distressed local governments and state-owned enterprises to diminish China’s fiscal, economic and institutional strength.

Consumer confidence in China has been muted since the onset of the Covid-19 pandemic in early 2020. Even though Covid controls were lifted at the end of 2022, falling demand globally for Chinese goods and a slump in the real estate market have weighed on consumer spending.

But experts believe there could be a shift in China’s spending patterns, where more consumers are choosing to spend on quality goods rather than higher quantities.

“The consumer landscape in China is undergoing a remarkable transformation as Chinese buyers increasingly prioritize high-quality goods over mass-produced, cheaper alternatives,” Jian Shi Cortesi, investment director of China and Asia equity GAM Investments.

She said this shift in spending is emblematic of the maturing Chinese consumer, also highlighting their growing disposable income levels. “This trend could herald promising prospects for businesses offering premium products and services, as they tap into this growing demand for quality.” 

Cortesi noted that the “Made in China” initiative — a government-led plan launched in 2015 that aims to move the country toward more cutting edge, higher-value products and services — has boosted China’s economy and allowed it to establish itself as a competitive global player.

“Although China’s authorities no longer trumpet the ‘Made in China’ initiative the way they once did, the initiative is progressing in line with the long-term plan,” she said, highlighting that more progress made in the initiative “will be a major driver of sustainable GDP growth, with the associated income growth bolstering domestic consumption in the next year.”

China has also moved to enhance its tech development and manufacturing, which Cortesi says “creates higher-paying jobs that should eventually filter through to boost consumption in China.”

The big question haunting China’s market recovery is: Will the government do more to support its economy?

China’s leaders have vowed to boost domestic demand, prioritize the development of strategic sectors and tackle the country’s real estate crisis, following a key meeting in December that laid out economic priorities for the new year.

“We foresee more policy room for fiscal support next year,” Serena Zhou, senior China economist at Mizuho Securities said.

Zhou said the main uncertainty for China’s 2024 outlook comes from government policy to aid the property sector.

So far, China’s leaders have signaled a strategy to build affordable housing in an attempt to resolve the nation’s spiraling real estate crisis, as authorities seek to diffuse risks linked to the ailing property sector, local debt and small and medium financial institutions.

“We will probably see more moderate supportive measures, such as encouraging private developers to refinance from the onshore bond market, allowing local governments to purchase unfinished projects from private developers and convert them into public housing projects, and involving private developers in urban village renovation projects through public-private partnerships,” Zhou said.

Market sentiment has shown signs of improvement as China rolls out measures to stem the property crisis, which many say could be key in improving demand domestically.

“Government support for the economy, including the property sector, is helping sentiment, and is driving upgrades to GDP estimates,” analysts at Jefferies wrote in a client note in December.