Can consumers save China’s economy?

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mOST OF THE GAILD economies struggling to live within their means; China is struggling to live up to them. Even in the best of times, the combined consumption of households, companies and the government is not enough to buy everything it can produce, leaving a surplus that is needed -trade: the country has run a trade surplus for 34 of the last 40 years. . And these are not the best of times. China is enduring the longest period of deflation since the Asian crisis more than a quarter of a year ago. The massive stock market rout since the end of 2022 has seen investors lose $2trn.

Behind that panic is a deeper fear among investors and officials, namely that China no longer has a reliable growth driver. The property boom is over. Cash-strapped developers are afraid to build apartments and families are afraid to buy them. The infrastructure mania has run out of steam: local governments have no money with debt. Exporting goods to the rest of the world, which China has relied on for decades to overcome poverty, is becoming more difficult as protectionism rises and Western countries grow wary of relying on authoritarian states.

So much depends on one remaining source of growth: increased consumption by China’s 1.4bn people. “The Chinese market, with its wide scope and growing depth, will play an important role in increasing overall global demand,” Chinese Premier Li Qiang told the World Economic Forum in Davos last month. went. New IMF A review of China’s expectations published on February 2 has 61 mentions of the word “consumption”.

The goal of increasing consumption makes sense. China’s stingy consumers often prefer to save, not spend. Consumption accounts for 53% of GDP, compared to 72% for the world. On this measure China ranks 156 out of 168 countries. His contribution to the world economy as a result is enormous. It accounts for 32% of global investment and 18% of GDP, but only 13% of consumption, according to Michael Pettis, economist. Even among emerging economies, China stands out: it consumed 7% less per person than Brazil in 2022, even though it produced around 40% of its more.

What are the expectations that rising spending will curb China? The good news is that 2023 showed some recovery as the end of pandemic-era restrictions allowed people to return to restaurants, shops and travel. As a result, spending accounted for more than 80% of growth, the largest share since 1999. The bad news is that prospects for a rate change appear slim, based on public sentiment, cross-country mathematics and China’s own history.

Start with public expression. The turmoil in the property market has damaged the incomes, assets and morale of ordinary Chinese. Take Mr. Chen, a construction worker from Jiangsu province. He has struggled at times to find work – and when he does it is not always paid. He put his savings into a flat for his children in a town near his home, where few properties find buyers. “What is scary is not the past, but the future. ” The feeling is mirrored in predictions: the IMF expect consumption growth to slow in 2024.

Photo: The Economist

Then consider cross-country math. Even if China escapes inflation this year, the long-term pivot required is alarming. For China to successfully rebalance its economy, consumption would need to increase by about ten percentage points GDPaccording to Mr. Pettis’ calculations. The Economist has investigated how often this type of movement has occurred around the world, looking at the experience of 181 countries since 1960 and dividing their economic history into successive periods of ten years. We found that in only 11% of cases did spending rise by more than ten percentage points in a ten-year period (see chart). Some of these issues are not exciting. Albania had a spending mania in the early 1990s but there was also hyperinflation. Taiwan managed a ten point trend from 1986 to 1996, but the consumer boom was associated with a wild stock market bubble.

Finally, consider China’s own history. Its policy makers have talked about rebalancing the economy towards consumption, and away from exports and investment, for almost 20 years, since a major economic conference in late 2004. back then, there is a total consumption share of GDP changed so far +55% compared to yesterday. Rebalancing, it seems, is easier said than done.


The right kind of wear

Even so, China has little choice but to try. One option is to foster a new consumer culture. Mr Li, in his speech in Davos, spoke of expanding purchases of big-ticket items, such as electric vehicles, as well as niche products including “smart” homes, tickets to sporting events and “Chinese goods “. But social change cuts both ways. Even as they say they want to encourage consumption, officials are protected against the wrong kind. Draft regulations on video games, issued in December then withdrawn, ordered companies to punctuate their games with pop-up warnings against “irrational consumption behaviour”. China’s leaders, on the other hand, could encourage consumption through short-term handouts to households. But they seem to see such labels as ineffective, wasteful or worse: an invitation to laziness.

That means that the most plausible lever is to make citizens feel more financially secure, so that they save less and splurge more. Expanding health care and pension provision is important in the long term. And perhaps citizens like Mr. Chen would feel comfortable spending more if it were easier for them to settle in the cities they work in. Under China húcou system, household record, Mr. Chen officially lives in his hometown. That makes it more difficult for him to access schools, hospitals or pensions in the big cities where he earns a living.

Cai Fang from the Chinese Academy of Social Sciences thinks of bringing urban migrant workers húcou Their consumption could increase by as much as 30%, although other studies report less impressive results. A study by economists at Southwest University of Finance and Economics in Chengdu found that rural migrants who receive cities húcou spend about as much as the native inhabitants of the town, but do so openly. The end of the housing bubble could also free up consumers. The cost of saving for a down payment and mortgage servicing was 11% of the disposable income of city residents in 2021, according to rough estimates by Goldman Sachs. That figure could drop to around 6% in ten years, he estimates.

But for now China’s approach to it húcou reform is timid and piecemeal, any gains from the housing median are years away, and there is little sign of a complete reform of the welfare state. Consumption may increase slightly as a proportion of GDP, as a large group of workers retires keep spending but stop producing. But the demographic drag associated with it is hardly a drag on growth. For economically insecure citizens like Mr. Chen, the equation only points one way. At 51 he is only nine years from the normal retirement age for blue-collar workers. But he has to look after his parents as well as his youngest child. “It’s all up to me. I don’t have to do the math.” For the Chinese government the calculation is just as frightening.

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