China's post-pandemic boom is more than what it seems, economists say

China’s post-pandemic boom is more than what it seems, economists say

Amazon CEO Jeff Bezos was briefly ousted this week as the richest person in the world by Bernard Arnault, CEO of French conglomerate LVMH, in large part thanks to China’s appetite for luxury goods. While this is good news for Arnault, China’s recovery – and a redoubled appetite not just for luxury goods but raw materials – is a mixed bag for the rest of the world, including the United States.

Arnault had an approximate net worth of around $ 192 billion, according to Forbes’ real-time tracker, compared to around $ 188 billion for Bezos. While broader market forces also played a role, Arnault’s rise to the top was aided by investors rewarding LVMH’s strong performance :, as well as. Much of this increase in income can be attributed to post-pandemic demand from wealthy Chinese consumers.

Consulting firm Bain & Company noted in a report released earlier this month: “China is driving recovery through continued repatriation and accelerating domestic luxury spending… China’s appetite and Chinese nationals for luxury remains insatiable.

But demand for raw materials and components is the narrative that will guide the recovery trajectory at home and abroad, a trajectory that threatens to eclipse the recovery in Chinese consumer spending. A global semiconductor shortage has crippled manufacturers in both East and West, and prices for commodities like metals, petroleum and concrete have risen, weighing on earnings projections for everyone from builders to homes to car manufacturers.

“They are already in a different frame of mind compared to the rest of the world,” said Alexis Garatti, head of macroeconomics at Euler Hermes, of China’s recovery.

These higher price increases will hit producers on both sides of the Atlantic, but the pain will not be shared equally, Garatti said. “We expect the margin to shrink,” he said, with the European Union being hit harder, reflecting the higher sensitivity of the euro area to price movements and the exposure of the companies to which they are. are facing.

“The bottom line is that the United States and China are recovering very quickly now. So you have the two largest economies in the world rebounding strongly [and] driving up the prices of things like copper, iron and wood, ”said David Dollar, senior researcher at the Brookings Institution.

“Much of the rest of the world is recovering unevenly … for the United States and China, it’s a mixed blessing that the other recovery tends to push up the prices of certain things.” , did he declare. “The combination drives up prices and it affects manufacturers on both sides of the Pacific. “

There is one big difference that could turn into an advantage for US economic activity: Home buying, despite some recent price pressures, has been held up overall as the country shifts to a post-pandemic economy. . These purchases are a key driver of downstream consumer activity, Dollar said, as people who buy homes often also buy home appliances, furniture, and home improvement goods and services. “Consumption in America has held up quite well,” he said. As the economy fully reopens, spending on services has also shown signs of stabilizing.

However, declining returns on investment and high public debt mean Beijing may find it difficult to maintain the status quo.

Even with wealthy Chinese consumers keen to purchase luxury goods, there isn’t the same kind of real estate-driven demand, Garatti said. “We do not see, for the moment, a very strong acceleration in consumption,” he said. “In China, to have high consumption, you also need a very strong housing market,” and Beijing, where rampant speculation has ignited the housing market, is looking for ways to curb this activity.

“I would expect luxury goods to boom, but that’s not the same as saying you’re going to have a generally consumer-driven recovery,” said Jacob Kirkegaard, senior researcher at Peterson Institute for International Economics.

On the contrary, Kirkegaard said that China’s voracious consumption of raw materials was based on a model of economic growth fueled by debt. “The demand for raw materials… has traditionally been associated with a growth model in China that is very investment-intensive,” he said. “And that has been a model of growth which has also led to a very high level of debt.”

Falling returns on investment, rising corporate debt and high public debt mean Beijing will struggle to maintain the status quo any longer, Kirkegaard said. “The rebound in Chinese growth is largely driven by infrastructure investment – not consumption – and, in my opinion, this is causing imbalances in the Chinese economy,” he said.