“One of the most important aspects of the A-share fall is that Chinese consumers shrugged it off and continued to spend,” said Rothman.
Though manufacturing and construction-related industries are weak, services and consumption, the largest parts of the economy that resulted from its significant rebalancing, remains healthy as evidenced by an inflation-adjusted year-on-year retail sales rise of 10.4% in July compared to 10.5% a year ago, according to Matthews Asia research.
New home sales rose 21% year-on-year in July, up from 16% in May and from a decline of 18% in July 2014.
“Even after the Shanghai Composite Index fell 37% from its peak, China continued, and continues, to be the world’s best consumption story,” Rothman said.
Amid the various indicators showing a slowing economy, there are a few bright spots in consumption. July SUV sales soared 34%, although passenger car sales slumped 7%. Gasoline consumption grew 10% in July from a year ago, and movie box office revenues rose 54% in the second quarter year-on-year.
Online shopping also shows no obvious signs of weakening, as express parcel deliveries rose 47% year on year in July, up from 44% in May and compared to 49% last July. Illustrating the boom in online shopping, 10 billion packages were delivered during the first seven months of the year.
This is likely to be the third consecutive year in which services and consumption will be larger and contribute more to China’s GDP growth than manufacturing and construction, Rothman said.
In the first half of this year, consumption accounted for 60% of China’s GDP growth.
The manufacturing and construction sectors are likely to remain weak as infrastructure and new-home construction is slowing, said Rothman.
The year-on-year growth rate of fixed-asset investment peaked at 30% in 2009 and has been cooling ever since and is down to about 11% this year.
This trend is the reason why China’s GDP growth has been decelerating and will not re-accelerate, but the health of the services and consumer sectors should ensure that the macro deceleration is gradual, Rothman said.
However, there is little evidence of a collapse in manufacturing. A survey of privately owned, small and medium-sized firms found that during the second quarter, wages for unskilled workers rose 6% year-on-year, and wages for skilled workers increased by 7%, according to Matthews research.
Government data shows that monthly income for the migrant workers who leave the countryside to staff most of the urban manufacturing and construction jobs rose 10% in the first half of this year, according to the research note.
Little wealth effect
The stock market slump was due to excessive valuations, not a significant change to the fundamentals, Rothman said.
There are about 50 million active individual investors in China, which is equal to only about 4% of the total population, or 7% of the urban population.
And most of those investors have been investing a fairly small amount of money: 73% of individual investors have less than the renminbi equivalent of US$15,000 in their accounts and less than 1% of accounts have more than US$1 million. Very few Chinese are likely to be betting anything close to their life’s savings. Another interesting indicator is that as the market soared, the growth rate of bank deposits slowed only slightly, to an average of 10.4% year-on-year during the second quarter of 2015, from 11.4% during the same period a year ago, before the market took off.
“All of this data helps explain why there was little wealth effect as the market rose sharply, and why there has been little negative wealth effect on the way down,” Rothman said.