Service consumption recovery gathers speed

China's economic recovery is on the right track and the recovery of consumption of services has gotten off to a strong start, said experts at foreign institutions.

The country's offline consumer service sectors like tourism, movies and catering, which were severely hit by the COVID-19 pandemic, saw a strong rebound in demand during the weeklong Lunar New Year holiday in late January, said Fitch Ratings.

Domestic tourist trips during the holiday jumped 23.1 percent year-on-year, recovering to around 90 percent of the pre-pandemic level during the same period of 2019, while tourism spending rose 30 percent year-on-year. Cinema box-office receipts achieved the second-highest take on record, and the number of tickets sold was only slightly below the 2019 level, according to official figures.

National retail and catering revenues reported by key enterprises increased 6.8 percent year-on-year. Dine-in consumption at restaurants and eateries grew strongly by 15.4 percent year-on-year, with average restaurant spending up 10.8 percent, according to the Ministry of Commerce.

"The extent of pent-up demand release for offline discretionary consumer services exceeded our expectations modestly, due to the rate of COVID-19 infections nationwide peaking faster than expected. We expect demand for catering, tourism, beauty services, cultural (offerings) and entertainment to recover steadily in 2023, barring a new wave of large-scale infections," said Fitch Ratings in a report.

Darius Tang, associate director of corporates at Fitch Bohua, a subsidiary of Fitch Ratings, said: "The decisive factor of China's economic growth in 2023 is the degree of consumption recovery, which depends on the strength of the stimulus policies and how COVID-19 would evolve. Even though these are still uncertain, the expansion of consumption scenarios triggered by the adjustment of pandemic control measures has a very definite and positive effect on the recovery of consumption."

Vanguard, a large investment company, said Chinese policymakers now appear determined to remove all COVID-19 controls. That development and stronger-than-expected economic data led Vanguard to upgrade its forecast for China's full-year 2023 growth from 4.5 percent to 5.3 percent.

Lu Ting, Nomura's chief China economist, said, "As sequential GDP growth in the fourth quarter of 2022 was much faster than we had expected, and as China's population seems to be reaching herd immunity quickly following the reopening in early December, we are raising our 2023 annual GDP growth forecast to 5.3 percent from 4.8 percent."

The peak of China's COVID-19"exit wave" has now passed and China's population is approaching herd immunity much more quickly than Nomura predicted in a previous outlook. The rapid ending of the "exit wave" has paved the way for a consumption rebound, Lu said in a research report on Feb 1.

The country's official manufacturing purchasing managers' index rose to 50.1 in January, up from 47 in December, ending three months of contraction. Thanks to recovery of the services sector, nonmanufacturing business activity index significantly increased to 54.4 from 41.6, much better than the expected 51.5.

The January rebound in PMI is in line with consumption figures during the Lunar New Year holiday, demonstrating a strong recovery in the Chinese economy. More importantly, the number of COVID-19 infections did not rebound significantly during the holiday, paving the way for further normalization of production and consumption activities, said the UBS Chief Investment Office.

This year, although slower exports will have a negative impact on China's economic growth, consumption growth in the country is expected to rebound to about 7 percent, compared with almost zero growth last year. In addition, investment is likely to stabilize at around 5.5 percent. Combined, these factors will hopefully drive the full-year economic growth to about 5 percent, said analysts at the UBS CIO.