Uncertainty haunts China’s middle class
Beijing may have to think again about domestic consumption being the main economic driver as rising debt levels take their toll on willingness to spend
China’s policymakers have long envisaged that domestic consumers would shoulder the main role in driving economic growth and reducing dependence on unsustainable levels of capital investment and exports. Rising prosperity and a growing middle class have brought the goal closer.
But mounting household debt levels and rising economic uncertainty appear to be weighing on the ability and willingness of the middle class to continue spending freely, a perception sharpened by official statistics released this week showing slower than expected growth in retail sales in July.
This has clouded Beijing’s hopes that consumer spending will offset export losses from the trade war with the United States and help maintain steady economic growth.
The figures are not conclusive, but evidence of a link between household debt and a sense of caution among younger consumers is compelling.
China may be renowned for the high savings levels of households, which are partly attributable to Chinese culture, but they are also due to the thrift of an older generation who endured hardships in the 1960s and 1970s that made them mindful of the need to save for a rainy day.
China’s new generation has a very different mentality, more akin to American counterparts, in the sense of living on borrowed money, and spending on a luxurious lifestyle. In a common scenario, newlyweds, most likely from one-child families, have inherited a flat each from their parents. They sell one to cash in on rising property prices, leaving them with a few million to spend on a lavish lifestyle, and eventually remortgage their home to sustain it.
People may think China has a very high household savings rate but, generationally, the culture has begun to change. Not only has the level of household debt become a serious concern, but the government has tightened credit. Faced with an uncertain outlook, the middle class has begun cutting back on conspicuous consumption. It is a self-fulfilling lack of confidence which, if not managed carefully, could have a serious knock-on effect.