Capital Economics analysts said that local consumers in China in theory can absorb the impact of the collapse of exports to the United States, but this requires much more governmental support than what appears to be the decision makers is currently ready to provide it.
Analysts pointed out that retail sales in China outperform the country’s exports to the United States by more than 10 times, which means that only 4% increase in the consumption of local commodities over a period of two years may be sufficient to compensate for the expected loss that is extremely to trillions of Yuan (276 billion dollars) as a result of US customs duties.
However, the report added that “this will require decision makers to increase financial transfers to families much more than what has been announced so far.”
Limited growth driven by motivation
China’s retail sales increased by 5.9% year on year during March, the highest growth rate in 14 months. However, “Capital Economics” warned that this rise is “greatly” to the consumer replacement program launched by the government.
Analysts emphasized that this type of program “may affect the composition of consumption, but it does not increase the purchasing power of families except by the amount of support only,” noting that the incentives for replacement for this year, which amounted to 300 billion yuan (41 billion dollars), represent only about 0.2% of the gross domestic product.
The report also indicated that the growth of real income witnessed a decline during the first quarter of the year, which reduces the chances of achieving a recovery in the absence of significant increases in the financial transfers of families.
Consumer confidence
Analysts considered that reducing the family savings rate may constitute another path to enhance local consumption, but it depends on the feeling of families with confidence towards their financial conditions, which is greatly linked to the recovery of real estate prices.
The report said: “If the prices of homes remain under pressure and the impact of the trade war on public confidence continues, then the government will have to persuade families to reduce their precautionary savings,” the report said.
Although more supportive political interventions are still possible, the “Capital Economics” expressed “its doubts about the Chinese government’s ability to provide adequate support that allows to increase the spending of families to the extent that it completely compensates for the decline in American demand.”
