China’s Consumers Get Their Mojo Back

I wrote in March that China opportunities outweigh risks for investors. New data for the first quarter strengthens my conviction that China’s economy is in the early stages of a gradual, consumer-led recovery that is likely to be sustained by accommodative government policy and large household savings. China is on track to drive more global economic growth than the U.S., Europe and Japan combined.

There are, of course, risks to this recovery story. The first is that the Chinese government might adopt policies which stymie growth. That was a problem in recent years, but I think this is a very low probability risk now, because Xi Jinping’s priority is to support a consumer-led economic recovery. The return to China of its most prominent entrepreneur, Alibaba founder Jack Ma, after a year outside the country, signals Xi’s understanding that he needs to create a better regulatory environment for the private companies that drive China’s economy.

The second key risk to the sustainability of the economic recovery now underway is a potential crisis in U.S. – China relations. While I expect the political relationship to remain strained, I think a crisis is only a medium-level risk, because Xi and Joe Biden are pragmatic, and recognize that a further deterioration in relations would be detrimental to each of their economies, as well as to their political prospects. In an April 20 speech, Treasury Secretary Janet Yellen suggested that the Biden administration is now taking a more constructive approach to Beijing. “We seek a healthy economic relationship with China: one that fosters growth and innovation in both countries.”

Additionally, an active approach towards investing in China, focused on companies selling goods and services to Chinese consumers, can help mitigate the impact of political strains.

Consumer confidence is back

China’s economy has clearly turned the corner, and is on a path towards a gradual, domestic demand-driven recovery. Confidence among Chinese households and entrepreneurs began to return in the first two months of the year and strengthened further in March. Retail sales, home sales, manufacturing and investment all improved in the first quarter compared to the fourth quarter of last year. Sales at restaurants and bars picked up strongly, suggesting that many Chinese have begun to shake off last year’s COVID-related trauma, and are ready to socialize and spend again.