One year after China lifted its pandemic control measures, the recovery momentum is already grinding to a stop. Economists have repeatedly warned that slower economic growth in China could hurt the world. However, experts are at the end of their wits on how to resuscitate consumer confidence in China.
China released a 6.3% annual growth for its 2Q23 gross domestic product (GDP), even though the base period last year was only 0.4% due to pandemic control. It only inched up 0.8% from the first quarter, missing expectations and indicating there are more challenges in the second half of the year.
More than 21% of Chinese youth aged 16 to 24 are out of work as of June, hitting another record high. Since the number of college graduates in China this year is estimated at 11.5 million, the youth unemployment rate is likely to remain in a high range in the next few months.
Since the purchasing power of young consumers is the main driver behind the purchase of new gadgets, and with China as a major market, that explains why smartphone sales remain slow.
DIGITIMES Research senior analyst Luke Lin said China's smartphone market shipment declined 7.2% year-on-year to total 62 million units in 1Q23, contributing an even larger decline of 13.2% on the global shipment during the same period. He estimated that global smartphone shipments in Q2 will decline by 6.4% year-on-year.
Eswar Prasad, professor at Cornell University and a former head of the International Monetary Fund's China division, was quoted by the Wall Street Journal that the figures highlight the need for more stimulus to power faster growth, as well as policy changes that will help revive confidence in China's private sector and spur faster productivity growth.
But Beijing did not sit idly. They have tried everything from their old tool kit to stimulate the economy. Instead of following other countries' interest-rate hikes to stem inflation, the headache of the People's Bank of China (PBOC) is deflation. It has been lowering the interest rates and bank reserve ratios to pump money into the market and boost the economy, but those measures did not work.
They have also been increasing public infrastructure investments and encouraging local companies to procure parts, components, and chips produced by local enterprises to boost industrial production.
It is consumer confidence and entrepreneurship in the private sector that needs CPR.
The weakness in the GDP data lies with the private and household sectors, according to Betty Wang, senior China economist of ANZ. "With few signs of a recovery in the property sector and an uncertain job outlook, the accumulation of household deposits suggests widespread pessimism."
Fixed asset investment in the private sector contracted by 0.2% annually in June, versus the 8.1% growth of the state-owned sector. Household deposits increased by 17-18% year-on-year in H1, the highest level in a decade. That means consumers are not spending anymore. They just stash their money in the bank, perhaps due to uncertainty in their job outlook. The ANZ report pointed out that the outstanding amount of household savings is equivalent to more than 30 months of retail sales.
With the supply chain diversifying and undergoing regionalization, those jobs are just not coming back if the companies have already established new factories in Mexico, Vietnam, Malaysia, or India.
Many small and medium enterprises (SMEs) went bankrupt during the pandemic. It is very difficult for those entrepreneurs to overcome their fear of uncertainty after experiencing unexpected events such as a draconian lockdown that threw them out of business. Nobody can guarantee things like that won't happen again in the future.
China used to be the locomotive of the global economy. But since that locomotive was forced to slow down for months during the pandemic, it takes much more energy to rebuild momentum due to its massive scale. Instead of using conventional measures such as investing in public infrastructure to window-dress the GDP data, more efforts are needed to restore consumer confidence and trust in a more predictable market economy.
