China’s thrifty consumers are key to its economic growth – can Beijing convince them to spend more?

As China’s economy slows, in addition to loosening monetary policy and investing in technology to counter the impact of its falling birth rate, the country must strengthen welfare provisions, such as health care, to bolster consumer confidence

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Visitors look at cars on display at Taiyuan International Automobile Exhibition in Taiyuan, the capital of north China’s Shanxi province, in October 2018. Consumer confidence remains weak due to concerns over a slowing economy, job prospects and housing market uncertainties. Photo: Xinhua

Published: 1:30pm, 1 Apr 2019Updated: 10:18pm, 1 Apr 2019

If anyone is going to champion faster growth in China this year, it will be up to consumers to go all out, save less and spend more to add growing weight to the recovery. But Beijing must play its part too, keeping consumers sufficiently upbeat to meet this year’s 6-6.5 per cent official growth target. It should also help the government meet its pledge to shift the long-term focus onto a stronger domestic economy rather than external trade.

It is no accident that China is evolving into an advanced consumer-driven economy, with consumer spending accounting for nearly two-thirds of economic growth. Beijing wants sustainable economic expansion based on more stable domestic growth with less vulnerability to volatile mood swings in the global economy. The damage to growth prospects from the US-China trade war has been a painful reminder that Beijing should capitalise more on its domestic strengths.

China’s consumers are important bellwethers and they could still be losing traction. Consumer confidence remains cautious and may lead to households holding back on spending in the face of rising economic uncertainties, not good news for an economy historically accustomed to thrift. China’s gross domestic savings rate, at 47 per cent of gross domestic product, is among the highest in the world, according to World Bank figures. A strong savings rate is a mixed blessing when it drags on growth.

The challenge for Beijing is how to tap into this deep pool of domestic savings, harness the pent-up spending power and channel it into a stronger, long-lasting recovery. Annual inflation-adjusted retail spending growth picked up to 7.1 per cent in February from a cyclical low point of 5.6 per cent in October last year, but it is too soon to say whether this marks a turnaround in consumer optimism after eight years of slowdown. Consumers have a lot on their minds right now.

Worries about the global trade outlook, job prospects and housing market uncertainties all underline growing risks to economic confidence. In the short term, there are things that can be done to help. Beijing must be quick to cut a trade deal with Washington to ease the logjam on world trade. More importantly, monetary and fiscal policy settings must be kept extremely loose and Beijing should prioritise vital infrastructure investments to revitalise domestic recovery.