Advertisement
Advertisement
China economy
Get more with myNEWS
A personalised news feed of stories that matter to you
Learn more
Questions are being asked about the feasibility of Beijing’s plan to rebalance its economic growth model. Photo: Reuters

Is China wise to bank on consumer spending to drive economic growth?

  • Rising household debt levels and concerns about job prospects are threatening to derail Beijing’s grand plan, analysts say
  • Short-term incentive schemes unlikely to offset negative impact of a slowing economy, ageing population

China has a grand plan to rebalance its economy by reducing its dependence on state-led investment and exports in favour of increased consumer spending. But after disappointing retail sales figures in recent months and a sharp rise in household debt, questions are being asked about the feasibility of Beijing’s ambitions.

According to the National Bureau of Statistics, in the first 11 months of 2018, retail sales – a measure of consumer spending that also includes government purchases – rose 9.1 per cent year on year to 34.5 trillion yuan (US$5.09 trillion).

However, based on calculations by the South China Morning Post, the actual growth figure was nearer 4 per cent. The state statistics bureau will release the full-year 2018 retail sales performance on Monday.

China wants consumers to drive economy, but are they all spent?

Given that China’s gross domestic product was estimated to have risen by 6.6 per cent last year, the data suggest that consumer spending actually weighed on growth rather than driving it. The official retail sales growth figure for November alone was the lowest for more than 15 years, at 8.1 per cent.

Last year saw the first year-on-year decline in car sales in China for almost three decades. Photo: Reuters

Meanwhile, last year also saw the first year-on-year decline in car sales for almost three decades and a revenue warning from iPhone maker Apple due to weak Chinese sales.

While the prevailing perception is that China’s 1 billion or so consumers have enough spending power to ensure near perpetual economic growth, Li Xunlei, chief economist at brokerage house Zhongtai Securities, said the figures needed to be put into context.

China to encourage its 1 billion consumers to spend to offset trade war

In a research note published this month he said that of China’s 1.3 billion people, about 1 billion had never been on an aeroplane, while 400 million were still living without an indoor flushing toilet.

While Beijing is banking on its affluent urban consumers – whose number it coincidentally also puts at 400 million – they are particularly vulnerable to the economic slowdown. Many are weighed down by large mortgages and other household debts, while concerns about job security and future incomes are ubiquitous.

China wants the middle class to stabilise the economy as trade war hits

People’s reluctance to splurge as a result of such fears – the so-called consumption downgrade – coupled with a smaller workforce as a result of a rapidly ageing population – new births in 2018 are estimated to have dropped below 15 million, their lowest this century – and a cyclical economic downturn are all obstacles to Beijing’s grand plan, analysts said.

Despite his normally bullish stance on the country’s prospects, Robin Xing, chief China economist at Morgan Stanley, said the latest consumer spending figures had been disappointing.

“If the overall economy is slowing, it will affect the jobs market and affect people’s expectations,” he said.

“In the last four months, the [consumption] data have been worse than forecast.”

In a bid to support economic growth, the central government said last week it was planning to roll out a series of incentives to boost sales of cars and home appliances in 2019 – it adopted a similar policy in 2009 to bolster growth after the global financial crisis – and recently announced lower personal tax rates.

Several local governments are also considering new initiatives. In the northern province of Hebei, which is a centre for heavy industry, authorities are considering reducing the working week to 4½ days to give people more time for shopping, while in Beijing and Tianjin, shopping centres are being encouraged to stay open later in the evening to keep the tills ringing longer.

China’s hopes of consumers rescuing the economy dashed

While cosmetic adjustments might give consumer spending a short-term fillip, Lian Ping, chief economist at Bank of Communications, said the bigger problem was the fact that people were basically hamstrung by household debt.

“The rapid growth in mortgage loans has left households in greater debt and squeezed their spending,” he wrote in an annual macroeconomic report released earlier this month.

A rapid growth in mortgage loans has left households in greater debt and squeezed their spending power. Photo: Alamy

China’s total household debt was US$6.58 trillion at the end of June 2018, or 50.3 per cent of its GDP, according to figures from the Bank for International Settlements. While the figure is still some way below the 76.6 per cent reported for the United States – or even the 52.5 per cent for Germany and 57.4 per cent for Japan – it is rising fast, having stood at just 18.6 per cent in 2008.

Why China cannot rely on consumers to spend their way out of the trade war

Lian said consumer spending on property and cars was peaking, adding that last year’s sharp decline in China’s stock market had also hit household incomes.

As house sales fell, so too would demand for furniture, home appliances and other related products, he said.

Iris Pang, chief Greater China economist for ING Bank, agreed, saying that consumer spending was becoming a victim of people’s concerns about job security and the bleak economic outlook.

“Consumption has entered a dark period,” she said. “People [governments] have to face the reality [of slowing retail sales growth].”

This article appeared in the South China Morning Post print edition as: W hy C o n sumers may not s a ve the day for Beijing
Post