Is China’s consumption story over?Here’s what the experts say

With an economy heavily dependent on manufacturing capabilities, market players are now focusing on the services and consumption sectors that will drive China’s growth in 2024.

While some slowdown is inevitable given China’s uneven recovery, Goldman Sachs expects services consumption to be more resilient than goods.

Goldman predicted that China’s gross domestic product could grow 4.8% in 2024. This will be primarily driven by a recovery in services activity, which we expect to grow at 9.2%, much faster than manufacturing, which is expected to grow by 6%.

Goldman Sachs said the recovery in consumer activity will be led by leisure-related activities such as hotel chain operators, online travel agencies and Macau casinos.

According to the U.S. investment bank, stocks expected to benefit most over the next 12 months include casino operators such as HWorld and Galaxy, online travel companies such as Trip.com and Dongcheng, and airlines such as Spring Airlines. It is said to be included. Online gaming companies such as FTG, NetEase, food delivery giant Meituan and tech giant Tencent are also expected to benefit.

Producer prices in China are softening due to sluggish consumer demand, which is a negative factor in consumer prices.

China’s consumer prices fell at the fastest pace in three years in November, falling 0.5% from the same month last year and October, according to recent data.

The country is plagued by soaring local government debt, a struggling real estate sector and declining domestic and international demand.

All of this contributed to the downgrade by Moody’s.

In December, the same credit rating agency downgraded the Chinese government’s credit rating outlook from “stable” to “negative,” indicating that the possibility of Chinese government support and bailouts for local governments and state-owned enterprises in distress is likely to affect China’s finances and economy. It was expected that the power of the system would be weakened.

Consumer confidence in China has been depressed since the outbreak of the coronavirus disease (Covid-19) pandemic in early 2020. Despite the lifting of coronavirus restrictions at the end of 2022, a decline in global demand for Chinese products and a sluggish real estate market are weighing on consumers.Spending.

But experts believe there could be a shift in China’s spending patterns, with more consumers choosing to spend on high-quality goods rather than bulk items.

“Chinese consumers are increasingly prioritizing high-quality goods over mass-produced, cheaper alternatives,” said Jiang Xi Cortesi, investment director at China and Asia Equities GAM Investments. “The environment surrounding consumers is undergoing remarkable changes.”

He said this shift in spending symbolizes the maturation of Chinese consumers and also highlights rising levels of disposable income. “This trend could offer promising prospects for companies offering premium products and services, capitalizing on the growing demand for quality.”

Cortesi said the “Made in China” initiative – a government-led program launched in 2015 aimed at moving the country toward more cutting-edge, higher-value products and services – would boost China’s economy and increase competition. He pointed out that this enabled Japan to establish itself as a powerful country. Global player.

“Although Chinese authorities no longer tout the ‘Made in China’ initiative as much as they once did, the initiative is progressing in line with long-term plans,” she said, adding that further progress on the initiative would be a “big deal.” It will have meaning,” he said. This will drive sustainable GDP growth and the associated income growth will drive domestic consumption next year. ”

China is also stepping up technology development and manufacturing, which Cortesi said “should create good-paying jobs and ultimately boost consumption in China.”

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

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

“We expect there to be more policy space for fiscal support next year,” said Serena Chou, senior China economist at Mizuho Securities.

Zhou said the main uncertainty regarding China’s 2024 outlook stems from government policies to support the real estate sector.

So far, Chinese leaders have sought to resolve the country’s spiraling real estate crisis, as authorities seek to diversify risks associated with the ailing real estate sector, local debt and small and medium-sized financial institutions. It has suggested strategies for building affordable housing.

“Perhaps encouraging private developers to refinance from the land bond market, allowing local governments to buy unfinished projects from private developers and converting them into public housing projects, and encouraging private developers to refinance projects in urban villages.” “We will see more moderate support measures, such as participation in renovation projects, through public-private partnerships,” Zhou said.

Market sentiment is showing signs of improvement as China rolls out measures to stem the real estate crisis, which many believe could be the key to improving domestic demand.

“Government support for the economy, including for the real estate sector, is supporting sentiment and prompting upward revisions to gross domestic product (GDP) estimates,” Jefferies analysts wrote in a December note to clients.