China’s massive client market will not be but recovering to pre-pandemic ranges

Tourists visit ice sculptures in Harbin, Heilongjiang Province on New Year’s Day 2023.

China news service | vcg | Getty Images

BEIJING — It will be some time before Chinese consumers really start spending again, despite China’s abrupt move towards a reopening.

About a month after the city of Guangzhou resumed in-store dining, local cafe owner Timothy Chong said revenue was recovering — to 50% of normal levels.

“At the end of December, the flow of customers gradually normalized, with a slight upward trend, but [a recovery in] Business volume has yet to wait,” he said in Chinese, translated by CNBC.

He anticipates that it will take at least three to four months for earnings to return to normal. In the past six months, revenue has fallen to 30% of typical levels, Chong said. He said the first Bem Bom Coffee store opened in late 2019, followed by a second store and coffee academy in August 2021.

China’s retail sales were slightly down for 2022 from November, official data showed. Consumption has lagged behind overall economic growth since the pandemic began almost three years ago.

For the coming year, Bain partner Derek Deng is holding back expectations. “The hope is that we at least get back to where we were in the first quarter of 2022,” he said, noting that this was just before Shanghai went into lockdown.

According to Wind Information, retail sales rose about 3.3% year over year in the first three months of 2022 but slowed to a 0.7% decline in the first half of the year.

A return to 2021 — when retail sales rebounded 12.5% ​​– would be a bullish scenario, Deng said. “I don’t think people see that as some sort of baseline, mostly because the macro factors are actually less favorable compared to 2021.”

The bulk of Chinese household wealth is tied up in real estate, a once-hot market that has plummeted in the last year. Stock markets in mainland China collapsed for the first time in four years in 2022. Exports, an engine of China’s growth, have started to fall in recent months as global demand slows.

Deng also noted fears of a second wave of Covid, the highly contagious XBB omicron subvariant coming in from overseas, and geopolitical uncertainties.

“I think that’s also impacting people’s perceptions of their disposable income or whether they need to save to get through all this uncertainty,” he said.

Chinese consumers’ propensity to save hit record highs last year, according to surveys by the People’s Bank of China.

Hopes for a travel recreation

Analysts are closely watching the upcoming Lunar New Year holiday for clues on consumer sentiment. The travel season for China’s big holiday runs from around January 7 to February 15 this year — with about 2.1 billion trips expected, according to official estimates.

That’s double last year and 70% of 2019 levels, China’s Transport Ministry said on Friday. It found that most trips are likely to be for visiting family, while only 10% are for leisure or business trips.

This year, many more Chinese will finally be able to travel abroad. The country is restoring the ability of Chinese citizens to go abroad for leisure after tightly controlling borders with the mainland for nearly three years. On Sunday, China also officially lifted quarantine requirements for inbound travelers.

However, Chinese outbound travel is unlikely to pick up again until around the next public holiday in early April, said Chen Xin, head of China Leisure and Transport Research at UBS Securities.

By then, people will be able to process their passport applications while the number of international flights may have recovered to 50% or 60% of 2019 levels, Chen said. He added that measures such as pre-flight virus testing requirements for visiting certain countries could be eased in a few months.

Inside China, Chen expects travel to get another boost after February as business travel picks up again and hotel business returns to 2019 levels by the end of the year. This is based on an industry metric that measures revenue per available room.

Not all go out

China’s major city streets are getting busier as the first wave of infections has passed.

But it’s mostly younger and middle-aged people who are on the move again, UBS’s Chen said.

After a gradual rollback of Covid controls, Chinese authorities suddenly scrapped most of the country’s virus testing and contact tracing measures last month. However, vaccination rates for the elderly in China are relatively low. In China, only domestically produced vaccines are generally available.

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Bain’s Deng is also monitoring whether consumers will start going out more. In the first three quarters of 2022, about 56% of consumer spending was at home – reversing the pre-pandemic trend, he said.

If the share of out-of-home spending can increase even a few percentage points, it will affect how malls and restaurants consider their business strategy, especially for delivery services, Deng said.

Chinese e-commerce giant for the past 18 months shortened the delivery window for many products from the next day to just one hour. That is through its partnership with dadanow majority owned by JD.

Company figures showed that the hour-long delivery platform roughly doubled sales of vegetables, beef and mutton in the period Dec. 16 to Jan. 1 from a year earlier. According to the data, sales of refrigerators increased 700%, while sales of flat-screen TVs increased 10-fold year-over-year.

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