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A point that is often lost in the trade war rumblings between the US and China is that Chinese economic growth is overwhelmingly driven by domestic consumer spending and not much at all by exports. Thus it is only logical that the recent retreat in Chinese share prices derives more from quiet concern over flagging consumer energies than from the trans-Pacific sound and fury.

One sign of this phenomenon is that consumer stocks have underperformed the slumping Shanghai and Shenzhen A-share indices over the past three weeks, with the CSI 300 Consumer Staples index down 12.3 per cent from its June high at the market close on Monday, compared with a fall of 11.3 per cent for the CSI 300 index, a benchmark A-share index.

“Recent weakness in Chinese equities is being largely attributed to China’s trade war with the US,” said Harry Colvin, director at Longview Economics, a London-based research company. “No doubt this has contributed. A more significant cause, though, is the recent weakening of consumption growth in China.”

Despite US complaints over the size of its trade deficit with China, exports are of marginal significance to China’s gross domestic product. Its current account surplus, which measures trade in goods and services, amounted to just 1.3 per cent of GDP last year and is widely expected to narrow further this year.

Consumer spending, by contrast, has been the marquee player both for the Chinese economy and for investors in companies such as Alibaba, Tencent, China Mobile, Kweichow Moutai and popular stocks. Andy Rothman, investment strategist at Matthews Asia, calls China “the world’s best consumer story” and estimates that consumption accounted for 77.8 per cent of GDP in the first quarter of this year.

But several signs now suggest that a recent slowdown in consumer activity derives from structural as well as cyclical factors. The key problem is that Beijing’s zeal to “deleverage” has resulted in the shrinkage of a complex web of formal and informal funding channels that companies use to fund consumer loans, analysts said.

“Consumption loans have either come from online platforms or consumer financing platforms, mostly funded by bond issuance or private funding,” said Miranda Carr, executive director, research at Haitong International, a securities firm. “As bond issuance and shadow banking are the two areas being hit in the deleveraging drive, this is likely to limit the availability of loans or raise their cost,” Ms Carr added.

Some of the changes are dramatic. According to Haitong’s research, the contraction in shadow banking loans was 81 per cent year on year in May, compared to an expansion of 56 per cent in May last year. One upshot of this is a squeeze in liquidity in the asset-backed securities market, a key source of funding for leading consumer loan companies such as Ant Financial.

Consumer loans are still growing, but at a sharply reduced pace. In May, loans to households for consumption grew at 22 per cent year on year, down from an expansion rate of over 30 per cent in May 2017. This, in turn, contributed to the slowdown in retail sales to 8.4 per cent in May from 9.4 per cent in April.

Louis Kuijs, head of Asia economics at Oxford Economics, a research firm, forecasts that the moderation will continue. “In all, with monetary policy less easy and wage growth seemingly softening as overall sentiment and confidence has weakened, we expect consumption growth to moderate in the second quarter,” Mr Kuijs said. In addition to the impact of deleveraging, a few cyclical or idiosyncratic factors are also having an impact. Ding Shuang of Standard Chartered in Hong Kong said the announcement of a cut in car import tariffs from July 1 hit auto sales as buyers postponed their purchases.

In addition, sluggish home sales due to more restrictive property policies have slowed sales of home appliances, furniture and other things that people tend to buy to fit out new apartments, Mr Ding said.

Separately, signs of a policy shift over an ambitious “shantytown redevelopment” plan, which has resulted in the building of 18m flats over the past three years and envisages another 15m more units by 2020, is providing some cause for caution.

Market speculation had it that the China Development Bank would stop channelling money to local governments under the plan. However, CDB said last week that it would continue to fund the projects, adding that it would happen in an “orderly” manner. Several analysts took this to mean that finance would be reined in.

All of this, analysts said, suggests slower GDP growth in the second quarter, from a bumper 6.8 per cent in the first quarter. But as signs of a slowdown spread, so do expectations that Beijing may take measures to invigorate easing demand, particularly in the face of US-China tensions.

“We look for more flexible policy to contain the downside risk to domestic demand should the China-US confrontation escalate further,” said Shen Jianguang of Mizuho Securities.



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