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Golden Week Chaos Brings Cheer for China's Economy

Li Anne Wong and Jean Chua
Thursday, 4 Oct 2012 | 2:14 AM ET

The annual Golden Week holiday in China is typically marked by chaos on motorways as millions of Chinese travelers hit the holiday trail, and this year is no different. The upside? The clogged roads are hints the economy may avert a hard landing, at least for now.

This is because the traffic gridlock tells a story that official data don’t: that the Chinese consumer is still confident about the economy, spending and going on holidays, even as the headline GDP figure slows and stock prices fall.

In the first four days of the eight-day holiday, arguably the most important dates for Chinese tourism in the calendar, the number of travelers to 119 major attractions across the country totaled 18.2 million, up 23.4 percent from the same period the year before, according to the National Tourism Administration. This compares to a 6.5 percent growth in 2010, and 8.8 percent in 2011.

Sales revenue at these destinations reached 957 million yuan ($151 million), up 25 percent.

Market watchers say this backs the view that the Chinese consumer remains a bright spot in a slowing economy—GDP of the world’s second-biggest economy slowed to 7.6 percent in the second quarter, its slowest pace in three and a half years.

“Chinese tourists are in a spending mood…something is stirring out there,” Uwe Parpart, chief strategist and head of research with Reorient Financial Markets in Hong Kong said. “People don't travel and spend when the economy is in terrible shape.”

So what’s behind the consumer optimism? According to analysts from Bank of America Merrill Lynch, a few factors are at play. For one, the employment picture, which has a direct impact on the consumer’s wallet, remains fairly robust. While wages in the first half of 2012 grew 13.1 percent from the year before, lower than the 14.4 percent figure in 2011, wage growth actually picked up due to lower inflation.

“Though we expect the unemployment rate to rise in 2H12, it is unlikely that we will see massive layoffs if the Chinese government would take some necessary measures to support growth for the rest of the year,” Ting Lu and Larry Hu, economists with Bank of America Merrill Lynch said in a report on Thursday.

Also helping sentiment is the fact that property prices have stayed almost unchanged in the past year despite numerous tightening measures, Lu and Hu said, adding that the consensus among investors are that real estate prices are about to recover.

Whilst Chinese stocks have staged an appalling performance so far this year, down about 15 percent on average, the impact is limited on Chinese investors who are largely used to high market volatility, and whose stock exposure on average is less than 20 percent of household bank deposits, they added.

“Chinese consumers are still relatively confident about China’s economic fundamentals,” Lu and Hu wrote. “Strong tourism data support our soft-landing views … and also point to a shift of consumption toward leisure, a new source of demand.”

Golden Week a Boost to Rebalancing Efforts

The Chinese government has been trying to rebalance the economy by increasing domestic consumption’s share of GDPand reducing the nation’s reliance on exports so that it would not be too vulnerable to a decline in overseas demand. During the 2009 financial crisis, Chinese exports plunged for the first time since 1983, by 16 percent over the year as demand from its biggest markets collapsed.

According to Parpart, the tourism data point to a resilient Chinese consumer and should give China’s rebalancing ambitions a boost.

“It’s a positive signal. Chinese salaries have increased by an average of over 20 percent over the past year and a half,” he said. “If some of that now goes to consumption, it is what the government likes to see to make the economy less dependent on exports.”

Indeed, to encourage people to travel and spend during the holiday, when normal economic activity is suspended and stock markets shut down, the Chinese government slashed entry-ticket prices at 94 tourist attractions nationwide by 25 percent on average.

BofA-Merrill says the upbeat travel data show China’s economy indicators run beyond the closely-watched electricity and manufacturing gauges.

“Robust Golden Week tourism data also suggest that China’s GDP data… might be more real than what’s perceived by (market) bears, who are focused too much on power usage and industrial production,” the report said.

By CNBC’s Li Anne Wong and Jean Chua

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