Strong growth ahead for China's 2021 retail sales

However, there may be risks over the immediate term due to new COVID-19 wave.

China’s retail sales is expected to record strong growth over 2021, as the country’s unemployment rate has practically returned to pre-pandemic levels at 5.2% for both November and December 2020, according to a report from Fitch Solutions.

With the strong outlook for the external sector, there is room for the labour market to tighten further and thereby boost disposable incomes and consumer sentiment over the coming months, the report added.

Pent-up demand dynamics is expected to be in place for 2021, with data from the People's Bank of China showing that households' deposits increased $1.75t (CNY11.3t) in 2020, whilst the average nominal disposable income grew by 4.7% YoY.

“Both of these will allow room for growth in domestic consumption over 2021, with bouts of ‘revenge spending’ expected, as the country vaccinates its population and gradually lifts movement restrictions,” Fitch said.

Over the immediate term, however, there may be some slight downside risks to growth arising from the latest wave of COVID-19 clusters that have emerged in Northeast China, resulting in lockdowns being reimposed at the city level in Hebei and Heilongjiang.

Retail sales growth in China recorded a 4.6% YoY growth in December 2020, a slight slowing from the 4.9% YoY posted in November 2020. Still, Fitch noted this to be a positive indication that the country’s spending levels have returned and are expanding once more.

China’s household spending is projected to rise 10.2% YoY to $5.82t (CNY37.8t) for 2021, a rapid recovery from the 1.2% contraction over 2020 and high enough to put its value above that of 2019 with $5.13 (CNY33.3t).

All of the main consumer spending categories are expected to return to positive growth in 2021. Food and non-alcoholic drink were prioritised in household budgets in 2020, and so growth in spending on these items will be slightly slower in 2021.

Meanwhile, spending within other consumer categories is estimated to have declined over 2020, so these categories will grow from a relatively lower base over 2021 and will report stronger growth over the year.

The consumer spending growth forecast in 2021 is in line with Fitch Solutions’s projection that the Chinese economy will grow by a real rate of 10.2% YoY over 2021 from an estimated 2.3% slowdown over 2020.