Following a year of patchy and poor post-pandemic recovery in 2023, China’s consumer mood may begin to improve this year.

Last year, the world looked to China’s grand reopening as a trigger to lift the global economy out of its current downturn, but those aspirations were dashed when economists warned the world’s second largest economy might not make its own aim of 5% growth by 2023.

Market players are increasingly looking to the services and consumption sectors to drive China’s growth in 2024, despite the fact that the country’s economy is strongly dependent on manufacturing.

While a slowdown is unavoidable given China’s patchy economic recovery, Goldman Sachs forecasts services consumption to be more resilient than goods.

Goldman anticipated that China’s GDP will expand 4.8% in 2024, driven primarily by a resurgence in service activity, which it expects to grow at a significantly faster rate of 9.2% than manufacturing goods, which are expected to grow 6%.

According to Goldman Sachs, the increase in consumer activity would be driven by leisure-related activities such as chain hotel operators, internet travel brokers, and Macao casinos.

Casino operators such as H World and Galaxy, online travel companies such as Trip.com and Tongcheng, and airlines such as Spring Airlines are among the stocks likely to benefit the most over the next year, according to a US investment bank. Online gaming companies like FTG and NetEase, food delivery giant Meituan, and IT behemoth Tencent are also anticipated to benefit.

Producer prices in China have been falling due to weak consumer demand, contributing to negative consumer price readings.

According to recent data, China’s consumer prices decreased the fastest in three years in November, down 0.5% from the previous year and compared to October.

The country has been dealing with rising local government debt, a struggling real estate sector, and declining domestic and international demand.

All of this contributed to a ratings downgrading by Moody’s.

In December, the ratings agency revised its outlook on China’s government credit ratings from stable to negative, citing Beijing’s support and potential bailouts for distressed local governments and state-owned firms as weakening China’s fiscal, economic, and institutional strength.

Since the Covid-19 outbreak began in early 2020, consumer confidence in China has been low. Even if Covid limitations were relaxed at the end of 2022, weakening worldwide demand for Chinese goods and a real estate industry downturn have hampered consumer spending.

However, experts believe that China’s buying patterns may be shifting, with more people choosing to spend on quality goods rather than quantity.

“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 stated that this shift in spending reflects the maturing Chinese consumer, as well as their increasing disposable income. “This trend could herald promising prospects for businesses offering premium products and services, as they tap into this growing demand for quality.”

Cortesi stated that the “Made in China” programme, a government-led effort announced in 2015 to shift the country towards more cutting-edge, higher-value products and services, has improved China’s economy and enabled 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 pushed to improve its technological development and manufacturing, which, according to Cortesi, “creates higher-paying jobs that should eventually filter through to boost consumption in China.”

The great issue looming over China’s market recovery is whether the government would do more to boost the economy.

Following a major conference in December that set out economic priorities for the coming year, China’s leaders have committed to raise domestic demand, prioritise the growth of important sectors, and address the country’s real estate issue.

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

According to Zhou, the greatest uncertainty for China’s 2024 prognosis stems from government policies to support the property sector.

So far, China’s leaders have signalled a plan to create inexpensive housing in an effort to alleviate the country’s spiralling real estate crisis, as authorities aim to mitigate risks associated with the ailing property industry, local debt, and small and medium-sized 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 mood has improved as China implements measures to address the property issue, which many believe will be critical in restoring domestic demand.

“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.

(Adapted from CNBC.com)

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