China’s weak consumer spending requires its leaders to upgrade policy toolkit, Beijing adviser says

Retail sales, a key indicator of consumer spending in China, contracted by 3.9 per cent last year, and experts say reform measures are needed to reverse the trend
Analysts have expressed concerns with the lingering weak recovery in domestic consumption, which is lagging behind a strong rebound in industrial production, investment and trade

China economy

Orange Wang

Published: 8:00pm, 21 Jan 2021

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Even though the Chinese economy continues its rapid recovery from the coronavirus shock, Beijing’s traditional policy prescriptions are too outdated to be successful in igniting a strong improvement in subdued consumer spending, a prominent adviser to the central government has warned.

More policy efforts to redistribute income and improve public welfare are needed, as well as more direct support for individual consumers, said Wang Yiming, vice-chairman of the China Centre for International Economic Exchanges and former deputy head of the Development Research Centre of the State Council. Wang personally advised Chinese President Xi Jinping on policy several times last year.

“[Chinese officials] are very experienced in guiding investment, and we have formed a set of effective methods,” Wang said at an online seminar on Tuesday. “But when it comes to guiding and expanding consumption, our means are relatively limited, and their effectiveness is not particularly significant.”

Wang’s comments came a day after China announced that its coronavirus-hit economy expanded by 2.3 per cent in 2020, which is expected to be the only positive growth rate among the worlds’ major economies. The growth rate also accelerated to 6.5 per cent in the fourth quarter, year on year.

But retail sales, a key indicator of consumer spending in the country, contracted by 3.9 per cent last year, with the growth rate decelerating to 4.6 per cent in December from 5 per cent in November.

Stronger consumer spending is an integral part of Beijing’s new dual-circulation strategy, which places a greater focus on the domestic market, or internal circulation, to drive economic progress.

Analysts have expressed concerns amid the lingering weak recovery in domestic consumption, which is lagging behind a strong rebound in industrial production, investment and trade. If consumption remains relatively weak, it could not only undermine the sustainability of China’s V-shaped rebound but could also impair the world’s second-largest economy in the longer term, analysts said.

“China’s economic recovery is remarkable but not complete,” said Shaun Roache, chief Asia-Pacific economist at S&P Global Ratings, in a note on Tuesday.

Chinese households are saving more rather than going on spending sprees, domestic demand is not getting much help from financial conditions in the world’s most populous nation, and growth momentum could wane when credit conditions tighten, Roache said.

A recent report by the China Macroeconomy Forum at Renmin University said weak household consumption was being driven by a slow recovery in consumer confidence, the income disparity gap and the resurgence of regional domestic outbreaks of coronavirus.

“These are likely to drag down the healing of the whole Chinese economy,” the report warned. Its proposed solutions included adjustments in taxation, enriching income sources, and narrowing the wealth gap by equalising education opportunities and by improving the national medical insurance and pension schemes.

Many analysts also expect Beijing to gradually unwind the fiscal and monetary economic stimulus policies it enacted last year to combat the damage caused by the coronavirus pandemic. But Chinese officials have also made clear they will continue needed support for the economic recovery.

The National Development and Reform Commission (NDRC), the country’s top economic planner, reaffirmed this week that there would be no U-turn in the government’s economic support policies this year while also confirming that some of the more aggressive stimulus policies would be gradually ended, with new emphasis on reform to support growth.

“However, it should be noted that some temporary and acute policies cannot continue as long-term measures. It is necessary to use more reforms to simulate the domestic vitality of market entities,” Yan Pengcheng, an official with the NDRC, said at a monthly press conference on Tuesday.

Wang predicted that the annual growth rate of retail sales could rebound to around 10 per cent if the pandemic can be effectively brought under control and the right policies are implement.

But the Chinese government’s existing macroeconomic policies appear to still regard investment, rather than consumption, as the largest driving force for growth, he said.

Final consumption expenditures accounted for 54.3 per cent of China’s annual gross domestic product in 2020, a weight 11.2 percentage points higher than investment, according to government data. Consumption has been the largest driving force for China’s economy for the last seven years.

Even if there were no pandemic, China’s household consumption would still not be strong enough

Wang Yiming

“Although some local governments issued consumer vouchers, the stimulus measures implemented for household spending, along with subsidies for low-income families and incentives for consumers, were not enough,” Wang said.

In a meeting last month, the Chinese Communist Party’s decision-making Politburo coined a new term, “demand-side reform”, indicating plans for greater efforts to address insufficient consumer demand. The idea later evolved into efforts aimed at “demand-side management”.

The government should carry out more reforms of income distribution, enhance coverage of public welfare, accelerate the urbanisation of migrant workers and expand public rental housing to reduce the mortgage pressure on younger generations, Wang said.

“Even if there were no pandemic, China’s household consumption would still not be strong enough,” he said. “The underlying reason has a lot to do with the continuously rising debt level of the household sector in recent years.”

“The so-called demand-side management calls for institutional structures” to support consumption, Wang stressed.

This article appeared in the South China Morning Post print edition as: Beijing’s playbook ‘unable to boost’ consumer spending