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China retail sales to weaken as falling home prices feed consumer insecurity: UBS

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Falling home prices and fears about job prospects will deter Chinese consumers from freely spending on goods such as clothes and home appliances, weighing on the nation’s retail sales growth, according to UBS.

Retail sales are expected to climb 5.5 per cent in 2024, one percentage point lower than the estimated 6.5 per cent rise last year, according to the Swiss bank’s estimates.

“A drop in home prices will have a negative psychological impact on consumers since they feel their net worth has shrunk,” Christine Peng, a UBS analyst, said at a media briefing in Shanghai on Monday. “As a result, consumers are reluctant to tap their bank savings to spend.”

Consumption has long been a major growth driver of China’s economy as the country’s 400 million middle-income residents chase high-quality goods to improve their living standards.

A sharp drop in home prices since the second half of 2023 has caused hundreds of thousands of families across the country to lose millions of yuan in net worth, while government incentives such as lower mortgage down payments and reduced taxes have yet to drive up property values.

For instance, home prices in Shanghai have declined at least 15 per cent since late 2022 because of a lack of buying interest, according to You Liangzhou, the owner of Baonuo, a property agency in the city.

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An average two-bedroom flat in the city’s downtown area that cost more than 10 million yuan (US$1.4 million) two years ago is now worth about 8.5 million yuan, You said.

UBS’s Peng said consumers’ heightened fears about salary cuts and job security have dragged down retail sales growth in the world’s second-largest economy, which is expected to expand 4.4 per cent this year, compared with estimates of 5.2 per cent in 2023.

Retail spending in China jumped 7.2 per cent year on year to 42.8 trillion yuan in the first 11 months of 2023, according to the National Statistics Bureau.

“Most white-collar employees are thinking of saving for a rainy day,” said Eric Han, a ­senior manager at Suolei, an advisory firm in Shanghai.

The central and local governments have to take some initiatives, such as tax cuts and distribute shopping coupons, to stimulate consumption, he added.

Personal care products witnessed a 4.5 per cent decline in average selling price over the first three quarters of 2023, while discounts offered by brands drove up sales volume by 2.5 per cent, the study found.

In the drinks segment, consumers exhibited a clear preference for value-driven choices, prompting a shift towards more economical products. The average selling price of beverages fell 1.5 per cent in the first three quarters, while a 1.6 per cent increase in volume was recorded.

There had been heightened expectations of a strong recovery in the mainland’s consumer sector after China’s reopening from the Covid-19 pandemic in the first quarter of last year.

But consumers kept a tight hold on their purse strings, with many inclined to buy discounted goods amid a gloomy economic outlook.

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