China’s recovery could be progressing better than markets expected as consumers spend more money onshore and the nation’s export engine gains market share.
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Welcome to Thoughts on the Market. I'm Robin Xing, Chief China economist for Morgan Stanley. And on this special edition of the podcast, we will discuss China's economic outlook and three themes emerging in a post-COVID time: recovery, reshoring, and retaining. It's Tuesday, August 25th, at 8:30 pm in Hong Kong.
In our last podcast on China, more than three months ago, we called its economy, "first in, first out" amid the COVID disruption. Now, we look back over the past several months, recovery is progressing better than the market expected as China's factories proved a relatively safe haven and consumer activity has returned to mostly normal, from dining to domestic air travel, which benefited from consumption reshoring.
Let me start with recovery. The recovery progress has been better than the market expected, driven by two factors: First, China's manufacturing capacity has proven to be the safe haven over the last two quarters. China's export engine has gained global market share at a faster pace, climbing to 14% of global market share from 12.9% two years ago. This is comparable to its previous peak and is also the highest level achieved by any country since the early 1980s. Meanwhile, high frequency data shows that consumption recovery momentum has remained intact. In July and August, most activities returned to normal from restaurants to air travel internally for vacations and Duty-Free shopping. Hotel occupancy ratio returned to 70% in August, around the year start level. While domestic air traffic is now at 90% of pre-COVID levels. Reflecting this, Morgan Stanley's global multinational China sentiment index rebounded meaningfully on China's growth recovery and domestic consumption.
We have also seen an interesting new trend: reshoring of overseas consumption. With COVID-19 inhibiting international travel, the Chinese consumers have been moving back onshore to spend what they typically do on overseas trips. Sales in Hainan duty free stores rose 240% year over year in July, while global cosmetic and the luxury goods reported a double-digit year over year growth in the first half and over 20% growth in the second quarter in China, citing new opportunity with the rise of domestic travel. And we expect reshoring to lift domestic consumption by about 100 billion dollars per year over the next three years.
Finally, retaining supply chains. As recovery has progressed well, we see PBOC, China's central bank, being on hold in the near term, while Beijing's policymakers are shifting the focus from the cyclical stimulus to the secular challenges in a post-COVID "slowbalization" world. The COVID-19 pandemic has prompted global manufacturing firms to rethink about their production and supply chains with a potential shift of focus from efficiency to resilience. While China's supply chain has proved resilient in near term, diversification pressure of multinational firms "China+1" strategy forces Beijing to react with further economic opening up measures and easier market access for foreign firms. Which means take the domestic market as the mainstay, coupled with the reshoring of the Chinese oversea consumption to attract foreign players to participate in China market and adopt “in China, for China” strategy.
So that's the three trends emerging in a post-COVID time in China: recovery, reshoring, and retaining.
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