This article first appeared in The Edge Malaysia Weekly on November 21, 2022 - November 27, 2022
ONE does not need to be a savvy online shopper to know that Nov 11 — dubbed “Singles’ Day” — is the one time of the year when discounts and deals can be too tempting to resist.
The 11.11 shopping bonanza that began in 2009 in China is the world’s biggest shopping event, even eclipsing the US’ Black Friday sales.
11.11 sales have been hitting new record highs every year since inception, making it one retail event that is closely watched by analysts as it is seen as a barometer of consumer sentiment. Consumption is an important economic indicator of the Chinese economy, given the country’s huge population.
Surprisingly, however, for the first time since the 11.11 sales started, e-commerce giants Alibaba Group Holding Ltd and JD.com Inc have yet to release the full sales results of their annual Singles’ Day shopping bonanza.
Depending on the media you read, two general pictures have emerged.
In the first, the non-disclosure implies that sales figures may have declined this year — an indication of weak consumption as a result of China’s strict Covid-19 containment measures.
The second focuses on how pre-sales in the run-up to the 11.11 event have been great, pointing to how consumer consumption patterns have changed.
So, is the glass half full or half empty, where China is concerned?
It is undeniable that China’s zero-Covid policy has come at a cost to not only the country’s economy but also the global economy, given that it is a key player in the global supply chain and functions as an important consumption engine for the world.
JF Technology Bhd co-founder Datuk Foong Wei Kuong discloses that the company’s operations in Kushan City in Jiangsu Province, which were set up late last year, were among manufacturing sites across the city that were suspended in April for 26 days.
“Workers were prevented from going into the factories. Our customers were also affected by the lockdown and could not operate. So, we decided not to operate as well. A lot of things were not clear back then. That was the time when even crossing borders and provinces were also a problem,” says Foong.
Nevertheless, he says the impact on JF Technology was minimal, as it experienced only some minor supply chain disruptions to its operations and logistics arrangements.
Federation of Malaysian Manufacturers president Tan Sri Datuk Soh Thian Lai tells The Edge that feedback from its members shows that some of them have faced delays in the production of finished items for domestic sales and exports because factories and warehouses in China affected by the lockdowns have been forced to halt production and delivery.
“Having learnt from the devastating supply chain disruptions during the peak of the pandemic period, Malaysian manufacturers are now better able to manage the risk of supply chain interruptions by sourcing from various geographical areas and looking at near-shore options to shorten supply chains and increase proximity to customers,” he says.
OCBC Bank economist Tommy Xie Dongming says there have been signs of a recovery since September, owing to China’s policy support and its resilient export growth.
“Nevertheless, the pace of recovery remains uncertain because of weak consumer sentiment as a result of multiple headwinds, such as people movement control and weak income growth. All the current data still points towards weak consumer sentiment, which will undermine China’s recovery of consumption. We expect China to grow about 3.5% year on year in 2022,” he adds.
October data showed that Chinese retail sales contracted 0.5% y-o-y from 2.5% growth in September, affected by repeated lockdowns across major cities, says DBS Research.
The research house adds that the growth of big-ticket items such as automobiles fell to 3.9% in October from 14.2% in September. Even daily used goods declined 2.2% y-o-y in September.
“An elevated unemployment rate and a negative wealth effect from the asset market drive rising precautionary savings. Household deposits jumped by 14.5% as at September. This, in turn, restrains the propensity to consume,” says DBS Research.
Meanwhile, China’s Industrial Production Index (IPI) slowed slightly to 5% in October from 6.3% in September, owing to supply chain disruptions between provinces, while the Producer Price Index fell 1.3% y-o-y — marking its first contraction since 2020.
Exports to its major trading partners, the US and Europe, fell for the first time in October as well, by 12.6% and 9% respectively. In some ways, it is not surprising, given that the European and US economies are suffering from high inflation.
The softer demand is expected to weigh on the Chinese economy, says OCBC’s Xie, although it may be partially offset by the stronger trade linkages between China and Asean.
“China’s net exports accounted for one-third of total growth in the first three quarters of 2022,” he adds.
Despite the drag on exports due to the expected slowdown in US and Europe, which will weaken global growth in 2023, S&P Global Asia Pacific chief economist Louis Kuijs expects China’s growth next year to be significantly higher than this year’s because of improved domestic demand momentum.
S&P Global has forecast China’s 2023 gross domestic product growth at 4.7%, with a possibility of an upside revision.
While the West was the first to open up borders and do away with containment measures, China has often been criticised for its zero-Covid policy and strict lockdown measures to contain the infection.
“People can look at it both ways. The US suffered one million deaths from Covid-19. So far, China’s casualties are fewer than 8,000 people. Just compare the difference. President Xi Jinping has always said that he emphasised [saving] lives,” says Value Partners Group Ltd co-founder Datuk Seri Cheah Cheng Hye.
“Having said that, it is time for China to gradually phase out the [zero] Covid-19 policy and that’s what they are beginning to do. But the process will take a couple of months before we can see the full opening, possibly by the second quarter of next year. Definitely, we are seeing the light at the end of the tunnel.”
Undoubtedly, this year’s Singles’ Day bonanza was overshadowed by Beijing’s announcement of the 20 measures to improve Covid-19 controls.
OCBC’s Xie observes that most of the measures announced are low-hanging fruit, including a shorter quarantine time and the end of circuit breakers for international passenger flights. He points out that the latest measures are not a policy pivot.
“As mentioned during the press conference on Nov 12 by China’s deputy head of the National Health Commission, the optimisation is [not] a relaxation ... Nevertheless, it does show that scientific facts outweigh the political calculation,” he says.
“The latest data shows that the infection rate of close contacts is 3.1 out of 100,000 while the infection rate of medium-risk districts is three out of 100,000. The data supported the reclassification of China’s quarantine measures. In addition, the fact that 99.7% close contacts tested positive within seven days also supported China’s decision to shorten the quarantine period to ‘5+3’.”
On the same day, the People’s Bank of China and China Banking and Insurance Regulatory Commission issued a notice with 16 measures to provide financial support to the housing market.
The news excited the market, giving a boost to China property stocks, as the announcement was seen as a positive move for the property sector, which had slumped after financial controls were tightened in 2021 to contain the property bubble.
So tight were the measures that some developers ran out of funds and fell into default, causing them to shut down operations before the completion of construction. Potential buyers were spooked and existing purchasers angered, leading to a slump in sales and damage to consumer confidence.
Moody’s Investors Service noted in a recent property sector report that the government’s latest measures were an indication that policymakers were keen to address the spillover impact from the sector’s downturn on the broader economy.
It said: “The latest measures from different regulatory bodies, if successfully implemented, would provide additional funding to the sector and alleviate some liquidity pressure.
“That said, the effect of these new measures would be subject to further details, including the scale and the timing of support, and the effectiveness of the execution. It will also take some time to restore market confidence.”
In a Nov 14 report, Standard Chartered Global Research said the measures — which cover mortgages, developers’ loans and bonds, construction loans, trust products, acquisition loans and leasing loans — signal a shift from a piecemeal to a comprehensive and concerted approach.
It said: “If implemented effectively, these measures could restore normal financing for relatively healthy developers (reducing default risk and expediting projection completion) and facilitate takeover of non-viable developers by financially strong developers.”
In essence, while there are pockets of the economy that need to be monitored, economists seem to be more optimistic about China’s growth moving into 2023.
Xie notes: “When we talk about China’s growth, there are three major macro risks, which include Covid-19, the property sector and geopolitical tensions. Things have improved notably in all three areas.”
He says that while it is still too early to call for a pivot away from the country’s zero-Covid policy, the signals of reopening are encouraging. He also believes the latest measures for the property sector indicate that China is pivoting away from the restrictive housing policy to a stimulus policy, which will contain the tail risk.
Lastly, China’s re-engagement with the Western world after the 20th Party Congress is also encouraging. “We expect situations to improve further into early next year, owing to two positive catalysts, including the possible downgrade of Covid-19 to class B infectious disease from class A by WHO as well as the US Secretary of State’s visit to China early next year,” Xie adds.
Cheah of Value Partners believes reforms that China embarked on in the last few years require sacrifices and that the China story “can only get better”.
“The Chinese system requires patience and sacrifice for long-term gains. This is a journey that will involve a lot of tears and heartbreaks,” he observes.
How would a China slowdown affect the Asean region?
For 2023, the average GDP growth forecast for China among economists polled by Bloomberg is 4.7% — an improvement over 2022’s forecast of 3.3%, but a shadow of 2021’s sterling 8.1% growth.
A slowdown in China’s economy would undoubtedly affect Southeast Asian economies via lower demand for goods and services, given that the country is a top trading partner of many countries, including Malaysia.
For the first nine months of 2022, total trade between China and Malaysia rose 18.5% to RM360.6 billion, or 16.9% of Malaysia’s total external trade. Malaysia’s exports to China grew 13.4% to RM155.4 billion while imports from China expanded 22.7% to RM205.1 billion, or 21.1% of total imports.
“Most Asian economies also rely on trade to complement domestic demand as twin engines of growth. Buoyant exports have been a strong growth catalyst to Southeast Asia economies post Covid-19 pandemic, reinforced by the implementation of the Regional Comprehensive Economic Partnership. So, a slowdown in trade with China will have cascading effects on the Southeast Asia domestic economies, and the affected sectors are likely to be the manufacturing, plantation and mining sectors,” says Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-economic Research Centre executive director Lee Heng Guie.
Apart from trade, Southeast Asia also relies heavily on Chinese tourists. This is especially true for countries such as Thailand, which was the most popular tourist destination for Chinese tourists in Southeast Asia prior to the pandemic.
Not only do Chinese tourists arrive in big numbers, but they are also the biggest spenders among tourists. Therefore, the absence of Chinese tourists has hurt the economies of countries such as Thailand significantly. Prior to the pandemic, the kingdom welcomed about 40 million tourists annually, with more than 30% from China.
Lee says a slowdown in China’s economy could also mean that the domestic tourism sector in Southeast Asia will be affected if Chinese tourists become more cautious of travelling abroad, owing to the slowing domestic economy amid restricted movements because of its zero-Covid containment strategy.
“With rising risk of global recession in 2023, and the US and Europe tilting towards recessionary conditions, China needs to … prevent the economy from slipping into a sharp slowdown, as it will definitely drag down the already weakening global economy into a longer slowdown,” says Lee, who expects China’s economic growth to improve by an estimated 4% to 4.5% in 2023.
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