Why China’s Long-Awaited “Revenge Spending” Boom Has Not Arrived

The National Bureau of Statistics of China announced last month that China achieved 4.5% year-on-year GDP growth in the first quarter of 2023, indicating that the Chinese economy is recovering at a faster speed than many growth forecasts. Caixin, for example, had predicted 3.8%, and a Reuters poll of economists averaged 4.0%. Meanwhile, China's household savings surged by ¥17.8 trillion ($2.5 trillion) in 2022, causing many economists to believe that these “excess savings” represent pent-up demand and could lead to a wave of “revenge spending” in 2023.

Yet China’s recovery remains uneven. Only the services sector 5.4% outpaced the Q1 GDP growth rate, significantly faster than agriculture and industry. The rather rapid recovery in consumption played a big role in fueling economic growth, causing some to believe that the long-awaited moment of “revenge spending” has finally arrived. A closer examination of the data, however, reveals a weaker recovery in consumption than meets the eye, with a slower rebound than forecasted.

Reason #1: The baseline number for consumption is low.

China’s total retail sales of consumer goods increased significantly in March, with a 10.6% YoY growth rate, marking the first double-digit growth since June 2021 (Figure 1a). Though, the high growth rate is misleading. Part of the reason that the growth rate looks good is that retail sales were notably weaker in spring 2022, as China battled its biggest wave of Covid-19. The monthly absolute value of retail sales, however, has been declining since December 2022 (Figure 1b). Observers should focus more on the risk of an uneven recovery and its long-term impact instead of the good-looking YoY growth rate numbers.

Remote Visualization

Reason #2: Uneven consumption growth suggests low consumer confidence.

As Chinese consumers gradually return to their pre-Covid lifestyles, it seems that they are releasing pent-up demand. Total retail sales were up 5.8% YoY in Q1, and the catering sector increased by 13.9%. Tourism during the Labor Day holiday week also rebounded to pre-Covid levels, with a 70.8% increase in the number of domestic trips. In contrast, the recovery of consumption of durable goods and big-ticket items remains slow. In Q1 2023, sales of household appliances and audio-video equipment were down 1.7% and purchases of building and decoration materials dropped 2.4%. Even passenger vehicle sales, the only bright spot of 2022, went down 13.4% in Q1. This demonstrates that market confidence has still not recovered as Chinese consumers continue to avoid committing to more big-ticket items.

There are additional worrying signs of low market confidence and hesitancy to spend. The NBS’s Consumer Confidence Index (CCI) is slowly recovering but still below 100, demonstrating that Chinese consumers remain pessimistic about the current economic situation and the future economic trend (Figure 2). The gap between the current and 2021 levels of the CCI further suggests that consumer confidence was hurt by the large-scale lockdowns during Covid and will take more time to recover.

Remote Visualization

The performance of the 2023 May Day holiday, the first big national holiday this year since the Chinese New Year, was also not as promising as expected. A total of 274 million domestic trips were made during the holiday nationwide, which is equivalent to 119% of the recorded number of 2019. Revenue from those trips reached ¥148 billion ($21.4 billion), which is 101% of the 2019 levels. Despite a strong rebound in the total number of trips made during the holiday, the revenue was not as promising, as a 19.1% increase in the number of trips only brought in a 0.66% increase in total revenue. Chinese consumers spent significantly less on each trip this year, a sign of a consumption downgrade caused by weak consumer confidence or bigger structural problems.

Reason #3: Structural challenges are inhibiting consumption.

A total recovery of consumption must be based on the growth of household incomes and expansion of their wealth. Despite this, the growth rate of per capita disposable income is still below pre-Covid levels. Chinese consumers do not have enough money to spend even if they have pent-up demand (Figure 3). This also suggests that the damaged household balance sheet will take longer to repair and further inhibit consumption.

Remote Visualization

Moreover, household savings continue to surge in Q1 2023 with RMB ¥2.08 trillion more saved than in the same period of 2022, which suggests that Chinese people are still avoiding tapping into their “excessive savings.” (Figure 4) 

Remote Visualization

China’s official manufacturing PMI has declined from 51.9 in March to 49.2 in April, which marked the first contraction since December 2022. In addition, the service PMI, despite a rapid recovery in Q1, faltered in April (Figure 5). The surprising downward performance of the two PMI suggests that the sustainability of momentum and market demand remains the key to China’s full economic recovery.

Remote Visualization

High unemployment is another problem that will significantly slow the recovery of consumption. To compare, the youth unemployment rate in the U.S. has returned to the pre-pandemic level, which is under 10%. The unemployment rate of those ages 16 to 24 in China rose to 20.4% in April, the highest level since records began in 2018 (Figure 6). Moreover, it is unlikely that we will see an improvement in the youth unemployment situation in the next few months, as about 11.6 million college graduates prepare to join the workforce in May and June. The private economy employs more than 80% of China’s urban workers and generates the most high-paying jobs for new grads. The surprisingly high youth unemployment rate suggests structural pressures on the economy as it struggles to absorb new labor, despite growth recovery and an aging, shrinking labor force. This also shows that the existing structural imbalance in the labor market has worsened during the pandemic: Chinese university enrollment has been expanding since the early 2000s, but the Chinese economy has not adapted to create enough jobs for this amount of well-educated workers. Companies are increasingly reluctant to hire more workers due to low consumer demand, but consumers are also hesitant to spend more in a weak labor market. If Beijing cannot find ways to boost the market confidence of private companies and stabilize their expectations, the youth unemployment problem will not be solved.

Remote Visualization

The three problems – the low baseline consumption numbers, low consumer confidence, and structural economic challenges – together add up to the big chicken-and-egg problem facing Beijing – more consumption is needed to achieve the full recovery of the whole economy, but more confidence in the economy and China’s future is needed to boost consumption. Beijing is well aware of this problem and is being realistic about its growth prospect in the April 28 Politburo meeting. The leadership noted that “the current upturn in China's economy is mainly in the process of recovering, with endogenous driving force still weak and demand insufficient.” It has also vowed to step up support for the private sector and improve employment opportunities, but those vows might remain rhetorical if the government cannot come up with more effective measures to maintain the sustainability of the consumption recovery.

Related Trustee Chair Activity 

Logan Wright, “Grasping Shadows: The Politics of China’s Deleveraging Campaign,” CSIS Report, April 10, 2023.

Scott Kennedy, Claire Reade, Paul Triolo, Jeannette Chu, John L. Holden, and Ilaria Mazzocco, “The Completed Construction of the Xi Jinping System of Governance,” CSIS Trustee China Hand Blog, March 15, 2023.

Qin (Maya) Mei, “Fortune Favors the State-Owned: Three Years of Chinese Dominance on the Global 500 List,” CSIS Trustee China Hand Blog, October 7, 2022.

Scott Kennedy, “Data Dive: The Private Sector Drives Growth in China’s High-Tech Exports,” CSIS Trustee China Hand blog, April 28, 2022.

Scott Kennedy, “The Biggest But Not the Strongest: China’s Place in the Fortune Global 500,” CSIS Trustee China Hand Blog, August 18, 2020.

Trustee Chair Hammer Logo
Qin (Maya) Mei
Research Associate, Trustee Chair in Chinese Business and Economics