China’s consumer spending signals economic recovery
Former Chinese premier Li Keqiang infamously said that he did not trust China’s economic figures. Instead, he used electricity consumption as a reliable guide to the state of the Chinese economy.
In the same vein, we can say that we cannot trust much of the Western analysis of the Chinese economy, which has a consistent bias towards gloom and doom, with some unsuccessfully forecasting the collapse of the economy for the past 25 years — and this week, its low PMI figures, disappointing growth, future problems with the recovery and Taiwan. This consistent litany of problems is also an unreliable measure of the Chinese economy, so businesses assessing their involvement in China must look elsewhere for evidence.
President Xi Jinping has spoken about a dual circulation economy, which has a greater reliance on Chinese consumer spending and reduced reliance on exports, and the infrastructure programmes that have characterised previous economic recoveries. Consumer spending patterns in the lead-up to the fiveday Labour Day holiday provide verifiable evidence of the state of the Chinese economy.
Reports compiled from railways and booking agencies estimate that more than 240 million trips occurred during the holiday. This is a spend of more than CNY120 billion ($23 billion) on tourism hotel bookings, and railway and air ticket sales. This does not take into account additional holiday spending on food, souvenirs, and services.
China National Railway Group projected a traffic volume of 120 million passengers over the holiday period. Meanwhile, colleagues have sent me photos of heavily crowded railway stations that look more like pre-Covid Spring Festival crowds than a Labour Day weekend.
We can use Ctrip, the leading travel
platform, in the same way that Li Keqiang used electricity consumption figures. Immediately before the start of the holiday, Ctrip announced that train and air ticket sales had seen a 10-fold increase y-o-y, while hotel bookings had jumped by 14 times.
The No 2 travel platform, Qunar, which focuses on domestic discount travel, also enjoyed the booking increases seen on Ctrip.
Travel, entertainment, retail and restaurant sectors are the primary beneficiaries in this holiday period, but the increase in spending shows an economy that is not on the edge of recession. This is discretionary spending and the size of this spending suggests that the Chinese consumer is not stressed about the economy. Consumers who are not confident about the future save their money. When consumers are confident about the future, they increase discretionary spending because they believe the future will continue to improve.
This increase in discretionary spending goes well beyond what some call “revenge spending”. This is the idea that savings accumulated over the pandemic are splashed in revenge. It may be a characteristic of Western consumer groups, but the Chinese tend to be more conservative when it comes to savings, so an increase in discretionary spending is a genuine signal of economic confidence.
The Labour Day holiday behaviour suggests China is well on the way to
achieving strong GDP growth in the second quarter and that the annual growth target of 5% is achievable.
Technical outlook for the Shanghai market
With just two days of trading since the previous notes, there is little to add to the chart analysis. Here’s a recap.
The rapid retreat in the Shanghai Index failed to find support near 3,280. The collapse moved strongly below the lower edge of the longterm group of averages in the Guppy Multiple Moving Average (GMMA) indicator.
The subsequent index rebound rally and close above 3,280 suggests the index retreat may be a temporary retreat in the longer-term uptrend.
However, the key questions remain because the market is not completely clear about trend development. The questions are: Does this retreat signal a return to the longer-term sideways trading band that dominated the market for much of 2022 and the first few months of 2023? Or does this rapid retreat suggest that the market is entering a new downtrend with downside targets near 3,150 or lower? Or is the retreat part of the consolidation prior to a continuation of the uptrend?
It is too early to know the answers to these three questions, but we can establish the conditions that will confirm the correct answer.
A return to the sideways trading band is signalled by a successful retest of long-term support near 3,220. This successful test may include some over-shoot activity as the market temporarily dips below this level. This is best assessed using a weekly chart. The close on the weekly candle should remain at or above 3,220 to confirm a continuation of the sideways trading band behaviour.
Confirmation of a new downtrend starts with sustained closes below the lower edge of the trading band at 3,220. A change in trend may include temporary rebounds from 3,220, followed by new retreats and down moves with closes below 3,220. Consistent small rallies and retreat behaviour with a downward bias confirms trending behaviour and a trend change.
The initial downside target for this type of trend change is set by measuring the width of the trading band and projecting this downwards. This calculation gives a target near 3,150. This level has acted as a relatively weak support and resistance feature in the previous two years.
Confirmation of an uptrend continuation is a sustained close above the upper edge of the sideways trading band. Applying the same trading band projection technique, the next resistance level is near 3,350. The GMMA relationship suggests an uptrend continuation. The short-term GMMA used the lower edge of the long-term GMMA as a support feature for the rebound.
Currently, there is a good probability that the index will rebound and move above 3,350. However, it is too early to know which outcome will prevail, but these trigger conditions will help investors and traders to make rapid decisions as the market trend develops.