Fresh blow for China consumers as utility costs surge

Beijing – China’s consumers, already weighed down by a property market bust and a lacklustre labour market, are now getting hit by the steepest jump in utility costs in recent memory.

At least 125 cities and counties have announced gas price rises of about 10 per cent since June 2023, according to estimates published in April by brokerage Haitong International Securities Group. Water and power prices also went up across the country, according to notices from the authorities.

It is not great timing. China’s retail sales just posted the slowest increase since the end of 2022, when Covid-19 was raging in the wake of lifted pandemic controls. Demand for cars, clothing and shoes plummeted in April, data on May 17 showed.

Rising utility costs risk curbing spending on other services and goods. Adding to the pain, China State Railway Group, in a rare step, raised fares for several popular high-speed routes by as much as 20 per cent starting in June.

“It’s a big hit to sentiment,” said senior China strategist Xing Zhaopeng at ANZ Bank China.

Households “have suffered a lot already from the sluggish income outlook”, so a living cost increase is yet another headwind, he said.

Local governments are pushing through the increases as the real estate crisis has decimated land sales, one of their main revenue streams. They have limited options after running up a debt load of about US$9 trillion (S$12.1 trillion).

CNCB Hong Kong Investment head of research Liu Boyang said “the main reason is to supplement the fiscal gap”.

While overall inflation in China is low – the headline consumer price index rose just 0.3 per cent in April from a year before – the danger is that higher utility costs could have a disproportionate impact on sentiment, because Chinese households have long enjoyed cheap rates, thanks to significant state subsidies.

In parts of Shanghai, residents braced themselves for a 50 per cent rise in their water bill. Some regions in the country have raised power prices – usually the biggest chunk of utility spending.

Still, utility costs make up only about 5 per cent of average household spending, according to broker Tianfeng Securities.

This means a massive pullback in consumption is not likely, according to UBS Group chief China economist Wang Tao.

In the meantime, policymakers are taking action to stoke spending, including a trade-in programme for new appliances, with modest subsidies starting to roll out in April. President Xi Jinping’s government on May 17 also announced its most forceful attempt yet to rescue the property market.

Economists remain largely confident that Beijing will achieve its 5 per cent economic growth target in 2024.

None of that offers much solace to the millions of consumers angry over higher bills each month.

Businesses are not spared by the price pressure either. They must now confront a different dilemma: to absorb the higher operating costs, or pass them on to customers who may already be feeling the pinch at home. BLOOMBERG