China’s post-pandemic boom is more than what you think, economists say

Amazon CEO Jeff Bezos was briefly called the richest person in the world this week by Bernard Arnault, CEO of French conglomerate LVMH, thanks in large part to China’s appetite for luxury goods. While this is good news for Arnault, China’s recovery – and a redoubled appetite not only for luxury goods but also for raw materials – is mixed 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: the company achieved nearly $ 17 billion in revenue in the past. first quarter of 2021, a jump not only over last year, but above 2019 figures, as well as. Much of this increase in income can be attributed to post-pandemic demand from wealthy Chinese consumers.

The consultancy firm Bain & Company noted in a report earlier this month, “China is driving the recovery with continued repatriation and accelerating domestic spending on luxury … China’s and Chinese nationals’ appetite 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 hit the hardest, reflecting the euro zone’s greater sensitivity to price fluctuations 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] drive up the prices of products 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,” he said. he declared. “The combination drives up prices and it affects manufacturers on both sides of the Pacific. “

There is one big difference that could turn into a benefit to US economic activity: Home buying, despite some recent price-inflicted pressures, has been held up overall as the country shifts to a post-consumer economy. pandemic. 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 pretty 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 demand propelled by real estate, 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 endemic speculation has ignited the housing market, is looking for ways to curb this activity.

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

On the contrary, Kirkegaard said that China’s voracious consumption of raw materials is based on a model of economic growth fueled by debt. “The demand for commodities… has traditionally been associated with a very investment-intensive growth pattern in China,” 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. “China’s rebound in growth is driven largely by infrastructure investment – not consumption – and in my opinion it is driving imbalances in the Chinese economy,” he said.

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