Consumer spending is critical to China’s recovery

It was a bleak year for the Chinese economy in 2022.

Strict zero-Covid measures and regulatory crackdowns on the real estate sector and digital platforms slowed economic growth significantly.

The annual real GDP growth of 3% was significantly lower than the official target of 5.5%. Chinese President Xi Jinping has indicated that the economy is the top priority in 2023.

Economic recovery in China hinges on reviving consumer demand. Exports and investment were the driving forces in 2022, but they are unlikely to continue on the same trajectory.

Export growth contracted in November 2022 due to falling external demand and a weaker global economy as a result of high inflation and monetary tightening. US efforts to “friend-shore” or “near-shore” manufacturing could further undermine export production.

External demand is projected to continue falling this year and private investment growth has been dampened by the property sector slump.

Public infrastructure investment has filled the void, but the continuous investment could further exacerbate the economic imbalances that the government is trying to avert. Consumer demand is crucial for economic growth in 2023.

Pent-up demand

The removal of Covid-19 restrictions allows more opportunities for consumers to shop and spend for the first time in almost three years.

According to CEIC data, Chinese household bank deposits increased by 42% since the beginning of 2020, totaling US$4.8 trillion. Pent-up demand is high and financial means are abundant. But fears about economic security have prevented households from spending.

China’s government could play an important role in stimulating consumer demand in the short-term as well as the medium- to long-term. Bolstering consumer confidence is key to accelerating economic recovery in the short term.

This requires the government to minimize the severity of Covid infections by providing effective medical resources and services. Targeted cash handouts are needed for low-income households and consumption coupons could incentivize them to spend.

Local governments could utilize the networks established in past poverty eradication initiatives to efficiently distribute cash assistance to low-income households in remote and rural areas.

More effective support must be given to the private sector which was battered by Covid-19, weakening external demand and supply chains.

Policies should go beyond tax cuts to include targeted lending and reduction of administrative burdens. Beijing should also consider subsidizing the payroll of small and medium enterprises to lower the cost of their reopening.

Reviving private enterprises is essential to creating jobs and income, as they account for over 80% of urban jobs in China.

A thriving private sector would continue to generate jobs and income growth, which would not only bolster consumer confidence but provide stable financial means for increased spending.

Rising consumer demand in the medium- to long-term continues to be a challenge. Some economists argue that consumption is low in China because its growth is export-led and investment-driven.

Higher consumption

Both the value of the yuan and wages are kept low to propel export growth and interest rates are depressed so industrial investment is effectively subsidized by low-cost household savings. The resulting low family income and wealth leads to low consumption.

As exports and investment drive job growth, reducing those sections of the economy does not directly translate into higher consumption.

Over the past two decades, China’s household consumption has increased at an average rate of 9.3% per year, more than three times the world average, due to high-income growth.

Proposals to increase consumption by cutting investment growth fail to address the real question: How can healthy consumption growth that sustains investment expansion and improves consumer welfare be supported?

Productivity and income growth, distribution and redistribution are essential to boosting consumption in the medium- to long term.

The Chinese government should continue to invest in the high-tech sector, research and development spending, and education to provide a sustainable basis for income expansion.

Promoting consumption growth does not necessitate cutting public investment but requires it to be productivity-enhancing.

The “common prosperity” initiative, which aims to reduce the rural-urban divide, expand public services and provide more opportunities for migrant workers, would go a long way to boost consumption growth.

With 500 million Chinese residing in rural parts of the country and the income gap between urban areas remaining high at 2.5:1, policies that support rural revitalization are critical to reducing the wealth gap.

The social safety net has been expanding in China over the past decade but public protection expenditure has remained low. Widening access to public services would reduce the need for precautionary savings, especially for migrant workers.

Economic downturn

Increasing consumer spending requires a rise, not a cut, in government spending.

China has attempted to boost consumption since the mid-2000s to address its unbalanced, uncoordinated, and unsustainable economy – efforts that have been made more urgent by the current economic downturn.

Boosting consumption growth should be driven by investment and government spending to ensure income continues to grow in a more equally distributed manner. This will require holistic policies and reforms.

Yan Liang is the Kremer Chair Professor of Economics and International Studies at Willamette University in Oregon.

This article is republished from East Asia Forum under a Creative Commons license. Read the original article here.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.