Chinese households are not responding well to a slowing economy and threats of a full-blown trade war. Our measure of consumer sentiment fell sharply in August to its lowest level in 16 months, dragged by reports of slower income growth and much less optimism about the economy.

The abrupt turn in our monthly consumer readings highlights the fragility of Chinese household sentiment and its vulnerability to more bad news. The government should not rely on consumers to lend their support to a slowing economy. 

The FTCR China Consumer Index fell 2.7 points month on month to 71.6 in August, the lowest reading since April 2017, while our measure of household incomes dropped to its lowest point in 21 months. 

These are not crisis levels — our headline index is 5.3 points below May’s record high 76.9 and 9.1 points above the series low, reached in August 2015, amid that summer’s stock market meltdown. Furthermore, our measure of consumer discretionary spending held up in August. 

Nonetheless, consumer sentiment has turned sharply over the summer as the economy has slowed and as the Trump administration has turned up the heat on Chinese industrial policies. Officials are responding to slowing growth by loosening fiscal policy and boosting infrastructure investment to try to keep the economy stable, insisting they will not resort to the large-scale stimulus measures of old. 

The housing market, which has done so much to boost consumer sentiment in recent years, remains under the policy cosh, and is likely to remain so as long as economic growth does not take a turn for worse. Consumers are still net positive on buying real estate for investment purposes, although August’s survey also indicated their faith in housing is also finally flagging. 

The FTCR China Discretionary Spending Index was largely unchanged in August, ticking up 0.1 point to 77.7. Our Discretionary Spending Outlook Index fell 1.3 points to 74.8, the lowest level since last July (74.4). 

Our Household Income Index fell 5.1 points — the biggest monthly decline on record — to 73.7. However, the index for our highest income group, composed of those reporting household incomes above Rmb300,000 ($44,000), rose 1.2 points month on month to 88.5. 

Our Economic Sentiment Index fell 6.3 points to an 18-month low of 67.5. Our Economic Outlook Index also hit an 18-month low, dropping 6 points to 75.7. 

Respondents estimated their average cost of living rose 7.4 per cent year on year in August — in line with the average 7.2 per cent reading of the previous 12 months — versus 6.4 per cent in July. The expected future rise in costs of living also rose, with respondents expecting a 7.1 per cent increase over the next six months, compared with 6.4 per cent in July. 

Consumers remained net positive on buying a home both for living in and for investment purposes for a fifth straight month, the longest unbroken stretch in our survey’s seven-year history, though both dropped from July. Consumers felt better about buying cars than in July but were less positive towards domestic and overseas travel. 

Our A-share Buying Sentiment Index, measuring whether consumers regard this as a good time to invest in A-shares, rose 1.4 points to a three-month high, despite another drop in renminbi share prices. 

Actual stock-buying intentions weakened, with more consumers indicating they plan to buy wealth management products and funds in the coming three months. The number of consumers saying they intend to buy P2P financial products over the next three months fell for a fifth straight month, and to its lowest level since August 2014, amid reports of multiple failures and outright fraud as the industry’s boom turns quickly to bust.

The FTCR China Consumer survey is based on interviews with 1,000 consumers nationwide. For further details click here. This report contains the headline figures from the latest Consumer survey; the full results are available from our Database.

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.