Despite China’s economic slowdown in the past pandemic era, there are positive developments. In August, the National Bureau of Statistics (NBS) released service retail data separately for the first time. In the first seven months, retail service sales in China grew by 20.3 percent year-on-year (y-o-y), outpacing the 7.3 percent growth in overall retail sales. According to the NBS, services accounted for more than 40 percent of per capita consumer spending.
This surge in service sales, driven by pent-up demand in culture, sports, healthcare, and business services, reflects a shift in Chinese consumption patterns from goods to services. While still lower than that in developed countries, where the share ranges from 50 percent to even 60 percent, this shift underscores changing consumer behavior, with improving consumer confidence crucial for sustained spending growth.
Understanding service retail sales and China’s decision to release separate data
Based on the definition from the NBS, retail sales of services encompass the total value of services directly offered by various entities (businesses and individual households) through transactions to individuals and other entities for non-production and non-business purposes. This metric aims to quantify the monetary value of services sold by service providers within the realm of consumption, including services in transportation, accommodation, dining, education, healthcare, sports, and entertainment.
The emphasis on services signifies China’s consumption landscape is evolving and becoming more sophisticated, and the consumption pattern is shifting from primarily goods-oriented to a mix of goods and services. This shift also demonstrates a heightened market confidence with implications for consumption expectations. Promoting service consumption is a key strategy for increasing domestic demand and elevating consumption patterns, contributing to high-quality macroeconomic development.
In the first half of the year, per capita service consumption expenditure among Chinese residents saw a notable increase of 12.7 percent y-o-y. This surge in consumer activity, such as shopping, dining, and accommodation, has driven growth in related service sectors. Specifically, the wholesale and retail industry saw a 6.6 percent y-o-y increase in value-added, while the accommodation and catering industry experienced a substantial 15.5 percent y-o-y growth, with catering revenue up by 21.4 percent.
Additionally, there has been a noticeable rise in residents’ willingness to travel, leading to a faster recovery in the cultural and tourism market. The transportation, storage, and postal industry saw a 6.9 percent y-o-y increase in value-added, and there was a remarkable 115.8 percent y-o-y growth in operating passenger turnover.
During the Labor Day holiday in May and Dragon Boat Festival in June, domestic tourism outings reached 274 million and 106 million trips, respectively, recovering to 119.1 percent and 112.8 percent compared to the same period in 2019. During the National Day holiday in October, China witnessed a total of 826 million journeys in domestic passenger trips—a remarkable 71.3 percent increase compared to the previous year and a 4.1 percent rise from 2019. Furthermore, data from the China Film Administration indicated a remarkable 52.9 percent y-o-y increase in the total box office earnings of movies in the first half of the year. These trends reflect a significant rebound in service-related activities, contributing to the overall economic recovery.
China’s economy faces multidimensional challenges
In the first quarter of 2023, China reported a 4.5 percent y-o-y GDP growth, while in the second quarter, it grew by 6.3 percent, falling short of the market’s expectation of 7.3 percent. Taking into consideration the low baseline effect caused by the pandemic, China’s economy still faces stringent challenges.
A full recovery in consumption depends on growing household incomes and increased wealth. Yet, per capita disposable income growth remains below pre-Covid levels, limiting consumers’ spending capacity even with pent-up demand. Further, since December 2022, monthly retail sales have been declining. The damaged household balance sheets will take time to repair, further hindering consumption.
Despite these signs of recovery, a closer examination of the data reveals a weaker and slower rebound in consumption than initially anticipated. Another reason for concern is the uneven nature of consumption growth, suggesting low consumer confidence.
While the retail service sales increased greatly, the recovery of consumption in durable goods and big-ticket items remains slow. Sales of household appliances and audio-video equipment decreased by 1.7 percent, purchases of building and decoration materials dropped by 2.4 percent, and passenger vehicle sales decreased by 13.4 percent in Q1 2023. This suggests that market confidence has not fully recovered, and Chinese consumers remain cautious about committing to more significant purchases, possibly due to pessimism about the current economic situation and future trends.
High unemployment poses another significant challenge to the recovery of consumption, and there are no strong indications that labor market weaknesses are improving substantially. China’s official urban unemployment rate has remained just above 5 percent in recent months. The unemployment rate for young people aged 16 to 24 has surged, reaching 21.3 percent in June. The NBS did not release a number for July and said it was suspending the data report. Additionally, the manufacturing Purchasing Managers’ Index (PMI), a key indicator of factory activities, has been in contraction since April, falling from 52.3 in June to 51.1 in July. This contraction in factory activities could further worsen China’s job market situation.
In an effort to address these challenges, the government has pledged new measures to promote high-level opening up to attract more foreign investment. However, this move comes amid escalating global competition for technological supremacy, which includes potential restrictions on U.S. investment in China. Some economists have alerted that China’s economic recovery remains hindered by insufficient demand, weak momentum, and low consumer confidence. Policies should be directed towards stabilizing large-scale consumption, boosting the consumption of automotive and electronic products, expanding rural consumption, and improving the overall consumption environment.
What are the government measures to stimulate consumption?
To bolster economic growth, the National Development and Reform Commission (NDRC) has outlined a comprehensive plan, with a focus on “restoring and expanding” consumption in July. This plan includes various measures such as boosting household income, improving the business environment for private firms, and stabilizing youth employment.
In addition, the Ministry of Commerce introduced an 11-point plan to enhance domestic consumption of household consumer goods and services. The aim is to tap into the potential of household consumption by improving product standards, sales methods, and overall shopping experiences to make them more appealing to consumers.
On July 31, the State Council published a set of 20 measures “Measures on Restoring and Expanding Consumption”. One key focus is the expansion of service consumption, with local governments encouraged to optimize regulations related to the operating hours of catering establishments to support their recovery and boost employment. These measures also include initiatives to stimulate purchases of new-energy vehicles, revive stalled property projects, increase the supply of affordable rental housing, and promote spending in sectors like catering, travel, and cultural events.