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People throng a shopping area in Shanghai on July 12. Retail sales growth might have slowed, but underlying consumer confidence remains strong. Photo: Reuters
Opinion
Macroscope
by David Brown
Macroscope
by David Brown

As China’s economy slows, can consumers pick up the slack?

  • Despite a slowdown, the economy can still level out at around 6 per cent growth in the next few years
  • But Beijing needs to keep consumer confidence pumped up with more fiscal stimulus if it wants consumers to lead a growth surge
China’s economy is slowing. Industrial production and retail sales growth have both decelerated sharply in recent months, so which sector could be the swing producer of extra impetus in Beijing’s drive for faster homespun growth?
Can China’s consumers take up the slack and lead domestic demand to higher ground or will the economy slip back into its old ways, with export-led growth making up the difference? Beijing is counting on consumers to make a bigger mark on the economy, but it’s not going to happen spontaneously.
With lower domestic interest rates probably ruled out by tougher policies coming soon from the US Federal Reserve, Beijing needs to keep consumer confidence pumped up with more fiscal stimulus and extra deficit spending.

The economy can level out at around 6 per cent growth in the next few years but Beijing needs to go the extra mile to make the difference.

Clearly, there has been a significant loss of economic momentum over the past two quarters but nothing more serious than an unwinding of the distortions caused by the Covid-19 pandemic, which has driven domestic business activity into disarray.

Year-on-year GDP growth in China has slowed from a peak of 18.3 per cent in the first quarter of the year down to 7.9 per cent in the second quarter, but this is still well above the five-year moving average of 6.3 per cent, which is probably more indicative of China’s underlying growth rate.

It would be misleading to straight-line the last couple of quarters and deduce that China’s growth rate is heading into the low single figures in the next couple of quarters. It will take a while before the volatility swings settle down, the economy begins to normalise and a truer trend emerges.

Beijing has set a GDP growth target of more than 6 per cent for 2021 but more important is what unfolds over the next few years as the economy emerges from the Covid-19 crisis and normal economic activity resumes.

The Organisation for Economic Cooperation and Development currently believes that China’s growth rate will ease back to 5.8 per cent in 2022 from the 8.5 per cent forecast for this year, down slightly from 2019’s 6 per cent before the Covid-19 crisis struck.

The World Bank is a little more cautious about the next few years, forecasting that China’s growth rate will decelerate to 5.4 per cent in 2022 and 5.3 per cent in 2023. The key issue is whether China’s economy can surprise on the upside and whether consumer demand will play a more active part in the return to stronger growth over the longer term.

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China’s consumers can certainly do their bit but it’s going to be tougher for Beijing to mount a consumer-led growth surge compared with the US. Consumer spending in China accounts for 56 per cent of GDP compared with 82 per cent in the United States.

Despite the pandemic shock, it’s been relatively easier for US policymakers to beef up recovery with near-zero interest rates, flooding the market with cheap credit and boosting consumer confidence with generous tax handouts under the government’s US$1.9 trillion fiscal stimulus plan. The US consumer sector is massive, easy to target and get quick results.

China’s policymakers have their work cut out, not least because there is limited scope for lower domestic interest rates, especially at a time when the US is on the brink of tightening monetary policy.

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In any case, the last thing China should be doing is aping Western economies with near-zero or even negative interest rates. Beijing needs a critical threshold of moderate rates to achieve a better level of monetary traction. Europe’s bane of negative interest rates is an object lesson in losing monetary control.

It’s far better for Beijing to keep monetary policy stable, allowing looser fiscal policy to take the strain of recovery efforts with more tax incentives and increased government spending to lift consumer morale going forward.

Retail sales growth might have slowed from a peak of 34.2 per cent in March, to 8.5 per cent in July, but underlying consumer confidence remains strong with a positive outlook for market stabilisation in the coming months.

With the right mix of policies in place, Beijing can beat the pandemic, with consumers leading the way towards stable 6 per cent growth in future.

David Brown is the chief executive of New View Economics

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