China's economic rebound is wobbling. Here are its strengths and weaknesses.

By Tanner Brown

An explosion in retail spending has helped compensate for a slowdown in China's traditional engine of growth, manufacturing

China's economy has entered a period in which cloudy COVID-related factors have dissipated enough to allow for clearer near-term forecasts. In theory, at least.

The rebound effects from low pandemic-era growth and the surge in consumer spending -- the debate continues on whether it is "revenge spending" -- following the end of virus restrictions have largely come and gone. What we are seeing now is closer to the new normal for the Chinese economy, said Hong Hao, chief China economist at GROW Investment Group in Hong Kong.

"It is much better than expected," he said of recent retail sales. "It suggests that the Chinese consumer is bouncing back."

Hong noted consumer bounces across multiple sectors, but singled out an area that had been slow to recover -- travel. China's weeklong Labor Day holiday began this weekend, and observers have been closely following the results. So far, people are on the move.

Hong said the data "smashed all expectations." Bookings soared 700% year-on-year and exceeded 2019's level by more than 20%, according to travel industry data. Baidu traffic monitoring showed an estimated 240 million people and at least 50 million vehicles on the road this weekend, many more than predicted.

"China is a country of big numbers. But numbers such as these still stun even old China hands like myself," Hong told MarketWatch.

Whether it is revenge spending, newfound confidence in China's economy and workers' job security or simply pent-up savings burning a hole under people's mattresses, consumers' wallets are opening.

Fewer Chinese are reporting needing to save money as much as they did during the uncertain times of the past few years. Retail spending exploded last month from dining to luxury items to property sales. Economists predicted a good month for domestic consumption, but the numbers -- a 10.6% leap in retail sales in March compared to the same period last year -- were several percentage points above consensus projections.

"New data offer the first evidence of a truly robust 2023 recovery," analysts at China Beige Book wrote over the weekend. "The economy fired on most cylinders in April, as indicators not only gained over COVID-depressed levels of a year ago but also bettered last month. In addition to the best consumer spending we've seen in months, property notched its best results since September."

That brings us to manufacturing, long the core driver of China's economic growth. Industrial output rose last month, though not as much as expected. A survey released Sunday of factory managers across the country showed more pessimism than the month before.

"A lack of market demand and the high-base effect from the quick manufacturing recovery in the first quarter" contributed to the contraction in April, Zhao Qinghe, a senior official at China's National Bureau of Statistics, said publicly Sunday.

Despite the weaker-than-hoped-for numbers in manufacturing, there were bright spots in the April data. Export orders surprisingly rebounded from March and domestic orders held steady. Production and new orders outpaced year-ago levels, China Beige Book analysts told MarketWatch.

Observers are now wondering what the state is planning to do to keep the nascent recovery going. Policy makers have long wanted domestic consumption to play a much bigger role in China's growth, which is happening. But no one wants slowing Chinese industrial production.

But on Sunday, China's top decision-making body, the Politburo, said it would implement more targeted support for "proactive fiscal policy" and prudent monetary policy for strategic industries, construction and infrastructure.

Despite the bumps across certain sectors, nearly all major investment banks have upped their 2023 GDP growth forecasts to, or above, 6% for the first time this year. Goldman Sachs and Deutsche Bank just revised up to 6%, while Citibank lifted its prediction to 6.1%. JPMorgan is the most bullish, estimating 6.4% for the year.

"A range of factors have led the strong rebound in 1Q activity, including a notable rebound in travel-related consumption and services," JPMorgan chief China economist Harbin Zhu wrote in a note to investors.

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04-30-23 1538ET

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