Consumer confidence crucial to China's economic recovery

Households suffered a large income shock in Q1.

Stimulus-driven demand must be handed over to the private sector if China wants its recovery from the pandemic to pick up steam and sustain through 2021, according to an article by S&P Global Ratings.

The report noted that China's economy is healing, but there are signs that private sector confidence remains exceptionally fragile at best. Household survey data from Q1 2020 indicated that urban disposable incomes rose by just 0.5% YoY.

"China's households suffered a large income shock in the first quarter and, together with evidence that the battle against COVID-19 is not yet over, consumers remain cautious," said Shaun Roache, the chief Asia-Pacific economist at S&P Global Ratings.

He noted that China's consumers may fret more about the level and volatility of their future income amidst the pandemic. They could also become more risk-averse, especially if they are worrying about falling through holes in social safety nets.

Fortunately, jobs and income security are considered to be the top priorities for policymakers this year, with much of this to be carried out by local governments.

If confidence does not improve, perhaps as a result of intermittent COVID-19 outbreaks, then private sector saving is expected to remain high. This may mean that policymakers apply more stimulus over a longer period until consumers are once again ready to take the lead.

Roache noted that, assuming a vaccine arrives by 2021, the country could record a relatively steep-sided U-shaped recovery as stimulus fires up activity this year before handing over to a more confident private sector in 2021.