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Chinese consumers move towards forefront of economic recovery

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For Cai Yuanhao, a Beijing-based courier, the world’s busiest shopping event is a slog. This year, despite the pandemic, it was busier than ever.

“There were too many packages to fit in my cart,” he said, pointing to the three-wheeled vehicle he uses to zip between Beijing neighbourhoods. From early November, Mr Cai worked from 6am to 9pm, delivering hundreds of items daily in the build-up to “Singles’ Day” on November 11.

The event, which originated as a way for single Chinese to console themselves through shopping, has become an annual splurge that reflects the country’s rising wealth and its rapid shift to online spending.

This year, as China continues to shake off the impact of coronavirus, it also offered a glimpse into the role consumption has played in the wider economic recovery. Some economists maintain that households will soon be ready for a more sustained rush to spend after months of caution.

From the evidence of Singles’ Day alone, appetite is already strong at a time of rising online activity. Alibaba, the country’s leading ecommerce platform, extended the event to an 11-day marathon and said shoppers in the country placed Rmb498.2bn ($75.8bn) worth of orders, up 26 per cent from the same period last year.


24%


Increase in year-on-year online retail sales in October

More broadly, growth in retail sales this year lagged behind industrial production — the standout driver of a world-leading recovery from coronavirus in China.

But the most recent data suggest consumption is beginning to close the gap. Official figures released in mid-November showed retail sales rose 4.3 per cent in October, compared with a 6.9 per cent rise for industrial growth. Catering sales, which are sensitive to coronavirus restrictions, also turned positive for the first time this year, adding 0.8 per cent. 

In a recent report, Morgan Stanley forecast that private consumption would replace exports and infrastructure investment as the main catalyst for growth in China next year, with gross domestic product rising 9 per cent.

“You have a lot of excess saving by Chinese consumers for this year,” said Robin Xing, chief China economist at Morgan Stanley. “We expect this excess saving will be partly released in 2021 as consumer confidence likely improves.”

Morgan Stanley pointed out that savings in the first three quarters of this year reached 37 per cent of disposable income, notably above previous years. In 2019, the rate was 32 per cent.

Goldman Sachs economists expect consumption to “take over the baton and become the main growth driver in 2021”, estimating that household consumption would increase 13 per cent in 2021, compared with a 4 per cent fall in 2020. 

In addition to a lower household savings rate, they suggested the labour market would continue to recover, with few signs of a “scarring effect”. Unemployment in urban areas was 5.3 per cent in October, compared with 5.2 per cent at the end of last year.

Uncertainty, however, persists. Xiaohan Lin, a 37-year-old bus driver in Fushun, a city in north-east China, planned to spend Rmb100,000 on a car this year but ended up spending 20 per cent less. “I need to prepare for the future under the current economic situation,” he said.

After his shifts were cut by 15 per cent, Mr Xiaohan took on an additional job at a mine to supplement his income.

Consumer behaviour across sectors is unbalanced, linked in part to the lingering impact of the virus even as cases remain low. Jingyang Chen, Greater China economist at HSBC, noted that some service sectors, such as tourism, had not yet fully recovered based on the latest data. She also noted that growth in retail sales was still half its level before the pandemic.

By contrast, online retail sales boomed 24 per cent year on year in October.

Car sales, nonetheless, paint a picture of improved offline demand, rising 12.5 per cent year on year in October. They also offer an insight into the support a recovering China can offer to global corporations. German carmaker BMW this month posted its best sales figures in history, stoked by sales in China that rose almost a third year on year in the third quarter. 

A full recovery of spending would support a longer-term strategy in China, where the government’s new five-year plan aims to emphasise domestic consumption. Morgan Stanley expects Chinese per capita income to exceed $14,000 by 2025, which Mr Xing said would be “crossing the threshold for high income status”. 

Foreign direct investment in China has recently increased, particularly in fields such as ecommerce and logistics that target the Chinese consumer.

“We will see continued upgrading of consumer demand,” said Mr Xing. “China is using the domestic market potential as the mainstay to open to foreign firms, giving them wider access to the local market.”

Additional reporting by Xinning Liu and Wang Xueqiao



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Petrobras/Bolsonaro: bossa boots | Financial Times

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“Brazil is not for beginners.” Composer Tom Jobim’s remark about his homeland stands as a warning to gung-ho foreign investors. Shares in Petrobras have fallen almost a fifth since President Jair Bolsonaro said he would replace the widely respected chief executive of the oil giant.

Firebrand Bolsonaro campaigned on a free-market platform. Now he is reverting to the interventionism of leftist predecessors. It is the latest reminder that a country with huge potential has big political and social problems.

Bolsonaro reacted to fuel protests by pushing for a retired army general to supplant chief executive Roberto Castello Branco, who had refused to lower prices. This is politically advantageous but economically short-sighted.

Fourth-quarter ebitda beat expectations at R$60bn (US$11bn), announced late on Wednesday, a 47 per cent increase on the previous quarter. This partly reflected the reversal of a R$13bn charge for healthcare costs. Investors now have to factor the cost of possible fuel subsidies into forecasts. The last time Petrobras was leaned on, it set the company back about R$60bn (US$24bn at the time). That equates to 40 per cent of forecast ebitda for 2021.

At just over 8 times forward earnings, shares trade at a sharp discount to global peers. Forcing Petrobras to cut fuel prices will make sales of underperforming assets harder to pull off and debt reduction less certain. Bidders may fear the obligation to cap prices will apply to them too.

A booming local stock market, rock bottom interest rates and low levels of foreign debt are giving Bolsonaro scope to spend his way out of the Covid-19 crisis. But the economy remains precarious. Public debt stands at 90 per cent of gross domestic product. The real — at R$5.40 per US dollar — remains near record lows. Brazil’s credit is rated junk by big agencies.

Rising developed market yields will make financings costlier for developing nations such as Brazil. So will high-handed treatment of minority investors. It sends a dire signal when a government with an economic stake of just over a third uses its voting majority to deliver a boardroom coup.

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South Africa’s economy is ‘dangerously overstretched’, officials warn

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South Africa is pushing ahead with plans to shore up its precarious public finances as officials warn the economy is “dangerously overstretched” despite the recent boom in commodity prices.

Finance minister Tito Mboweni hailed “significant improvement” as he delivered the annual budget on Wednesday and said that state debts that will hit 80 per cent of GDP this year will peak below 90 per cent by 2025, lower than initially feared.

But Mboweni warned that President Cyril Ramaphosa’s government was not “swimming in cash” despite a major recent tax windfall. The Treasury now expects to collect almost 100bn rand ($6.8bn) more tax than expected this year after a surge in earnings for miners. This compares with a projected overall tax shortfall of more than 200bn rand. Still, the finance minister made clear that spending cutbacks would be necessary.

“Continuing on the path of fiscal consolidation during the economic fallout was a difficult decision. However, on this, we are resolute,” Mboweni said. “We remain adamant that fiscal prudence is the best way forward. We cannot allow our economy to have feet of clay.”

The pandemic has hit South Africa hardest on the continent, with 1.5m cases recorded despite a tough lockdown. An intense second wave is receding and the first vaccinations of health workers started this month. More than 10bn rand will be allocated to vaccines over the next two years, Mboweni said.

‘We remain adamant that fiscal prudence is the best way forward’ – South African finance minister Tito Mboweni © Sumaya Hisham/Reuters

Even before the pandemic’s economic hit, a decade of stagnant growth, corruption and bailouts for indebted state companies such as the Eskom electricity monopoly rotted away what was once a prudent fiscus compared with its emerging market peers. 

Government spending has grown four per cent a year since 2008, versus 1.5 per cent annual growth in real GDP. The country’s credit rating was cut to junk status last year. Despite this year’s cash boost, the state expects to borrow well over 500bn rand per year over the next few years. The cost to service state debts is set to rise from 232bn rand this year to 338bn rand by 2023, or about 20 cents of every rand in tax.

The fiscal belt-tightening will have implications for South Africa’s spending on health and social services. On Wednesday Mboweni announced below-inflation increases in the social grants that form a safety net for millions of South Africans. “We are actually seeing, for the first time that I can recall, cuts in the social welfare budget,” said Geordin Hill-Lewis, Mboweni’s shadow in the opposition Democratic Alliance.

The finance minister is also facing a battle with union allies of the ruling African National Congress over a plan to cap growth in public sector wages. South Africa lost 1.4m jobs over the past year, according to statistics released this week. The jobless rate — including those discouraged from looking for work — was nearly 43 per cent in the closing months of 2020.

The South African treasury expects the economy to rebound 3.3 per cent this year, after a 7.2 per cent drop last year, and to expand 2.2 per cent and 1.6 per cent next year and in 2023 — growth rates that are widely seen as too low in the long run to sustain healthy public finances.

“The key challenges for South Africa do however persist, clever funding decisions aside,” Razia Khan, chief Middle East and Africa economist for Standard Chartered, said. “Weak structural growth and the Eskom debt overhang must still be addressed.” 



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Turkey’s Uighurs fear betrayal over Chinese vaccines and trade

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For five days this month, Jevlan Shirmemmet and other Uighur activists protested outside the Chinese embassy in Ankara, where they demanded to know the whereabouts of missing family members in China’s Xinjiang province. But on the sixth day, Turkish police stepped in.

They prevented the activists from gathering outside the diplomatic mission, positioned themselves outside their hotel and accompanied them wherever they went.

The stand-off reflects the difficult balancing act that Turkey, which is home to tens of thousands of exiled Uighurs, must perform with Beijing, not least because it wants closer ties and investment and is reliant on China for supplies of coronavirus vaccines.

President Recep Tayyip Erdogan, who casts himself as a champion of oppressed Muslims around the world, has in the past been a vocal critic of China’s actions in Xinjiang, the north-western region where the Chinese Communist party has interned more than 1m Uighurs, Kazakhs and other Muslims.

“On the one hand, Turkey wants to stand up for us, we know that, we feel it,” said Shirmemmet, 29, whose mother has been detained in Xinjiang since early 2018. “But they aren’t able to. We feel like their hands are tied.”

Jevlan Shirmemmet’s mother has been detained in the Chinese province of Xinjiang since early 2018
Jevlan Shirmemmet protesting in Ankara. His mother has been detained in the Chinese province of Xinjiang since early 2018 © Jevlan Shirmemmet

Analysts say that the plight of China’s Uighurs poses a problem for Erdogan, who is seeking alternative global partners at a time when relations with the west are deeply strained. “They are Muslims, they are Turks, and Turkish voters are sensitive about the issue,” said A Merthan Dundar, director of the Asia-Pacific Research Centre at Ankara University. “The government cannot establish very close relations with China. But it doesn’t want to cut all ties.”

In years past, Erdogan was one of the most outspoken global Muslim leaders concerning the plight of Uighurs, who are seen in Turkey as part of a broader global family of Turkic peoples whose rights Ankara has a responsibility to defend.

But opposition parties have accused Erdogan’s government of toning down its criticism to avoid upsetting Beijing. “Europe and America have spoken out against the oppression of our Uighur brothers in China . . . But there is still not a sound from Ankara,” Meral Aksener, leader of the opposition IYI party, said last month. Turkish officials insist that they continue to raise their concerns with Beijing behind closed doors.

Some figures in Erdogan’s government have advocated for stronger ties with Beijing in order to lure Chinese capital at a time when foreign direct investment from western countries has dwindled.

Investment so far has been limited, with the value of Chinese investment in Turkey standing at $1.2bn in 2019 in terms of equity capital, according to central bank data, compared with more than $100bn from Europe.

A woman in eastern Turkey receives the CoronaVac vaccine. Turkey has ordered 100m doses of the Chinese-made jab
A woman in eastern Turkey receives the CoronaVac vaccine. Turkey has ordered 100m doses of the Chinese-made jab © Chris McGrath/Getty

Ankara is eager for more. The country’s sovereign wealth fund has been courting Chinese investment, and plans to open an office in China in the first half of this year. Ankara also has a swap agreement with China’s central bank that helped to boost the appearance of Turkey’s depleted foreign currency reserves by an estimated $2bn. 

The pandemic has added an extra complexity to the relationship. While Turkey has struggled to procure European-made vaccines, it has a deal in place for 100m doses of the CoronaVac jab made by Chinese drugmaker Sinovac Biotech. Delays to the shipments in December coincided with a decision by China’s parliament to ratify an extradition treaty between the two countries. Turkey has yet to ratify it.

Yildirim Kaya, a member of parliament from the opposition Republican People’s party, said that the ratification of the treaty by Beijing had created “a great deal of panic among Uighur Turks who have escaped from China to Turkey”. In a set of questions posed to the Turkish health minister, he demanded to know if Ankara had faced pressure to ratify the deal to speed up the delivery of the vaccines. Turkish foreign minister Mevlut Cavusoglu reacted angrily to such suggestions. “We don’t use Uighurs for political purposes,” he said. “We defend their human rights.”

Analysts are also sceptical that China would use the vaccine, of which Turkey has already administered 6.2m doses, as such crude leverage. Ceren Ergenc, an associate professor of China studies at Xi’an Jiaotong-Liverpool University in Suzhou, believes it is more likely that Ankara was doing Beijing a favour by signing a deal for a vaccine that had yet to be approved in China — and that still has question marks over its efficacy.

“It happened at a moment when China needed not necessarily the money but the prestige in the international system about the credibility of its vaccines,” she said. “There’s a kind of indebtedness or reciprocity — Turkey still needs financial support from China so it did this act of buying the Chinese vaccine that had at the time not yet undergone all phases of testing.”

In response to questions from the Financial Times, the Chinese embassy in Ankara said the recent protests had sought to “smear” China and that their actions had threatened the safety of the diplomatic mission. It strongly rejected the notion that it had used Turkey’s need for vaccine doses as political leverage as “absolutely unfounded conjecture and malicious misinterpretation”.

Still, the episode has left many members of the Uighur diaspora feeling deeply nervous about their place in Turkey. “China sees us as criminals,” said Mirzehmet Ilyasoglu, who joined this month’s Ankara protests to demand information about his missing brother, brother-in-law and four friends. “We hope that this [extradition] agreement won’t come before parliament, but if it is signed then our concern will grow.”



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