China's sluggish consumer spending negatively impacts its economy, with potential Trump tariffs looming as a looming concern.
The combined statistics demonstrate the complexity that China's authorities will face in securing a steady economic resurgence up until 2025. This is due to the potential for worsening trade relations with China's main export market and persistent weakness in domestic consumption.
Donald Trump, the incoming US President, has promised to levy tariffs exceeding 60% on Chinese goods, which might prompt Beijing to expedite plans to transform its $19 trillion economy. This shift from the existing growth model based on fixed-asset investment and exports to a consumption-driven one has been a topic of discussion for over two decades.
According to data from the National Bureau of Statistics (NBS), China's industrial output grew by 5.4% in November annually, exceeding expectations of a 5.3% increase. However, retail sales, a measure of consumption, declined to its weakest rate in three months, at 3.0%, significantly slower than the 4.8% rise observed in October. Analysts had anticipated a 4.6% expansion.
Dan Wang, a Shanghai-based economist, pointed out that China's policies have consistently prioritized manufacturers over consumers, despite evidence of long-lasting weakness. This could lead to enhanced production capacity, potentially exacerbating the overcapacity issue and encouraging Chinese companies to explore overseas markets.
Fixed asset investment also increased at a slower pace in January-November, reaching 3.3% compared to the expected 3.4% rise. Nevertheless, Xu Tianchen, a senior economist at the Economist Intelligence Unit, suggested that worries about weak retail sales might be exaggerated due to the early commencement of the 'Double 11' shopping festival, which resulted in sales being moved to October.
Despite this, consumer demand continues to be heavily reliant on government subsidies, which contributed approximately 1.5-2 percentage points to monthly retail sales, according to Xu.
China's blue chip index declined by 0.37% in early afternoon, while Hong Kong's Hang Seng Index dropped by 0.57%.
Further easing anticipated
Policymakers have started outlining their plans for 2025, taking into account the anticipated strain on an already fragile economy due to Trump's return to the White House.
Over the weekend, an official from China's central bank suggested that there is room for further lowering the amount of reserves that banks must hold. However, past easing measures have shown little impact on borrowing, in part due to the unresolved property crisis that is hampering consumer confidence and keeping around 70% of household savings in real estate.
Even though there were some encouraging signs in China's new home prices, which fell at the slowest pace in 17 months in November, it may still be premature to declare a recovery, analysts say.
Maintaining a growth target of around 5% for the upcoming year will depend on stabilizing the property sector, representing 25% of China's economy at its peak, according to experts.
A recent Reuters poll predicted China's growth rate to be 4.5% next year, with the potential for new U.S. tariffs to shave up to 1 percentage point off the growth rate.
Moody's Ratings adjusted China's GDP growth forecast to 4.2% from 4% for 2025, following last week's Central Economic Work Conference (CEWC), during which China's top authorities vowed to increase the budget deficit, issue more debt, and place a stronger emphasis on boosting consumption.
Julian Evans-Pritchard, head of China economics at Capital Economics, expressed optimism that the decline in November would likely be temporary, as policy support continues to be strengthened. However, he cautioned that stimulus would not result in anything more than a short-lived improvement, especially considering the unlikely sustainability of current export demand once Trump begins to carry out his tariff threats.
In light of Donald Trump's proposed tariffs on Chinese goods, Beijing might accelerate plans to transition its $19 trillion economy from a growth model reliant on fixed-asset investment and exports to one driven by consumption, as discussed for over two decades. These tariffs could put a strain on China's economy, making further easing of monetary policies necessary to support business activities.
