China's growth drivers threatened by falling consumer confidence
Consumer confidence in the Chinese economy reportedly fell in August to similar levels seen in February 2016. In particular, measures for household finances fell a further 6.8%, down 13.4% YoY, along with the employment outlook indicator, which fell to a six-month low, as wide-spread job losses have resulted from the country's shift to cut excess capacity from its commodities and industrials sectors.

Chinese tourists at Hong Kong's shopping district Causeway Bay. Reuters/Tyrone Siu

Chinese consumer confidence in August fell to its lowest level since February, a somewhat ominous signal given the dramas the Chinese economy was going through at the beginning of the year.

The latest Westpac-MNI China consumer-sentiment index fell 2.2% to 111.5.

A reading of 100 is deemed neutral, indicating that optimists and pessimists are equal in number. A figure above 100 indicates that there are more optimists than pessimists.

While on balance this is still the case, it is also true that there has never been a sub-100 reading in the history of the survey, dating back to April 2007.

Fitting with the weakness in the headline index, it came as no surprise that four of the survey's five components weakened in August.

Of note, measures on household finances dived, particularly for expected finances, which slumped to the lowest level on record. It fell by 6.8% — the fourth decline in the past five months — leaving the year-on-year drop at 13.4%.

Westpact

That isn't exactly building confidence when it comes to the outlook for consumption, especially as this is being relied upon to power economic growth in the years ahead.

Perhaps explaining the weakness in sentiment, expectations for the labor market continued to deteriorate, with the employment outlook indicator declining to a six-month low of 92.2.

Chinese policymakers are attempting to remove excess capacity from the nation's industrial and commodities sector, resulting in widespread job losses.

Perceptions toward business conditions also weakened, with the measures looking one and five years ahead sliding by 4% and 0.9%.

Despite the weakness in the gauges measuring personal finances, the only component that improved in July was durable buying conditions — a measure on expected spending — which rose by a robust 2.1%.

Westpac notes there was a significant increase in car-buying sentiment, with the survey's car-purchase expectations indicator moving back above the 100 level to its highest since April.

Though he believes some of the weakness in August could have been caused by isolated events, Matthew Hassan, a senior economist at Westpac, acknowledges that deterioration is "concerning and a threat to what is still only a patchy improvement in the wider economy."

"Some of the August sentiment decline may be due to one-off events, with significant developments both in China (severe flooding in northern and central China) and abroad," he says.

"However the overarching theme is still of a clear loss of confidence since earlier in the year. Chinese consumers are less convinced that business conditions are improving and look to be bracing for another hit to their finances."

Given the importance of consumption as a driver of Chinese growth in the period ahead, Hassan believes "restoring confidence will be critical to shoring up demand near term and may also be critical in ensuring a more durable recovery emerges down the track."