China Brief: The Return of the Chinese Consumer?

Retail sales, dining out, tourism, and property purchases have seen a healthy recovery in the first quarter of the year.

2022 could be described as a year of resilience for the Chinese economy. Consumer confidence and consumption took a big hit, forcing decision-makers to rethink their strategies. Retail sales dipped slightly into negative territory (-0.4 percent), the first such decline in recent memory. The Consumer Confidence Index (CCI) plunged from around 120 at the start of 2022 to around 85 by the end of the year.

But with COVID-related travel restrictions now lifted, Chinese consumers are starting to spend again. In this brief note, fresh data on retail sales, travel, and residential real estate shows the extent to which Chinese consumption is recovering.

Retail Roars Back

Despite the dip in retail sales, urbanization continued its forward march, and rising incomes lifted another 10 million households into the ranks of the upper-middle class.

The combination of wealthier consumers, low inflation, and constrained purchases led to the generation of large amounts of cash stashed away in savings accounts, cash that consumers are poised to resume spending.

As we reflect on the first quarter of 2023, which just concluded, business leaders are now asking, “Where do we stand with Chinese consumption?” The numbers we’re seeing lead us to conclude that while we expect a solid rebound in consumption, we should remain cautiously optimistic for 2023.

After growing 5 percent in the first quarter, retail sales rose by 9 percent in March. Consumers are going out to restaurants and bars again, with spending in this category rising 14 percent in the first quarter, and 26 percent year-on-year in March.

After bottoming out at the end of 2022, the CCI’s upward tick to 95 in February is the number to watch.

Examining pockets of growth reveals that apparel has seen the strongest growth compared to last year. Food (7.5 percent) and cosmetics (5.9 percent) have also experienced healthy growth. Looking at March numbers, growth is even stronger for cosmetics and apparel, and surpassed the record levels of 2021.

Consumers still seem cautious when it comes to spending on higher-ticket items. Home appliance sales continued to slide compared to last year, and were even below 2021 levels. The same held true for autos, which saw a decline in the first quarter, though March did witness positive momentum, growing by more than 8 percent. This growth in the overall market was driven by the notable surge in electric vehicle sales of 25 percent in Q1, and 34 percent in March, compared with the same period in 2022.

Tourists Hit the Road Again

Chinese tourists are traveling again, with a 70 percent increase in flights. Domestic air travel in March nearly reached pre-COVID levels, after many months of limited flight activity. Despite the steady recover of travel between mainland China, Hong Kong, Macao, and Taiwan, flights are still hovering at less than half of pre-COVID levels. The May holiday period will likely push these numbers higher.

Real Estate Bounces Back

Residential real estate is also worth a look. Property prices are on the upswing, and the volume of property transactions has returned to 2019 levels. Average price per square foot jumped by 18 percent in the first quarter compared with the same quarter in 2019, while transactions saw a 4 percent rise during the same period.  Given the importance of this asset class for Chinese consumers, this will be an area to watch in the months to come.

What’s Next?

So, what do these numbers tell us about the remainder of the year that lies ahead? The first quarter sprint we just witnessed has created positive momentum going into the second quarter, momentum that supports consensus forecasts of around 6 percent GDP growth this year.

While some measure of cautious optimism is deserved, we believe executives would be prudent to keep the difficult lessons learned over the past year fresh in their minds. Staying agile, and mapping out strategies based on potential scenarios for the future, will serve them well.

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