Consumption recovery remains gradual, weighing on commodity demand

Over three months after China lifted Covid restrictions, the economy is recovering, but at a relatively slow pace and with a divide in spending among consumers based on income.

Early May sees China’s labor day holiday, the first big holiday following Chinese New Year. Business publication Caijing notes that many hotels in the island resorts of Sanya are already sold out and some prices are up to 5000-6000 yuan per night ($724-869 USD).

But at the same time, it noted that less expensive tourist destinations like Yunnan province aren’t seeing as strong of demand.

The number of tourists booking their hotels two months in advance of the holiday is up 22% year on year and the prices for five-star hotels are up 12.4% compared to last year.

While those increases are being touted as a sign of recovery, those are relatively small increases when accounting for the situation at this time last year.

In mid-March 2022, omicron was spreading around China and triggering lockdowns, large areas of Shanghai were already in lockdown, and interprovincial travel was extremely difficult and usually required departure tests along with multiple rounds of testing at the arrival destination. In that context, these appear to be weak numbers.

The paper Shanghai Securities News’s front page on Wednesday pointed to some “micro indicators” that showed “economic stabilization” and that “recovery momentum is becoming more obvious”.

One metric showing an improvement was industrial electricity demand. The paper cited Henan province’s industrial electricity consumption from January 1-February 26 rising by 2.2% year on year which also seems relatively weak.

The paper also cited the growth of express package delivery, but these numbers have been growing for years as more consumers shop online.

In a press conference, the National Bureau of Statistics also noted that there are “pressures and challenges” to achieve the government’s GDP growth target of 5%. The bureau also said, “As the economy gradually recovers, employment increases, residents’ income increases, and consumption capacity will gradually increase.”

Many expected a sharp recovery after China dropped its zero Covid restrictions. But three years of the policy, and especially the strict policies of 2022, have affected consumer habits and willingness to spend.

On the agricultural side, downstream demand for many products, including flour and pork, is still described as weak and this will be a headwind as demand is set to gradually recover and not bounce sharply back.