US trade war, household debt and labour market raise questions over China’s latest bid to spur spending

China’s latest bit to spur consumer spending to counter the effects of falling exports and to stabilise growth has been questioned by analysts due to high and rising household debt combined with an uncertain labour market and income outlook due to the trade war with the United States.

The new interministerial body will be responsible for pushing forward plans to upgrade consumption and to study new ways to boost spending, according to the State Council. It will be comprised of 24 ministries, with the National Development and Reform Commission (NDRC), the country’s top economic planner, taking the lead.

“While uncertainty over the outcome of the trade war may be playing a role, a bigger factor behind the cautious attitudes [of consumers] is probably employment conditions, which have deteriorated in both the manufacturing and services sectors recently,” according to a research by Capital Economics released this week.

“African swine fever will soon push consumer price inflation to an eight-year high. This will drag down real income growth and is likely to lead to a further deterioration in consumer sentiment.”

Beijing has long realised the importance of shifting its investment-led growth model to a consumption-driven one, with the shift taking on greater importance due to the trade war with the United States.

At the annual Central Economic Work Conference in December, the government pledged to build a strong domestic economy to offset the impact of external uncertainties. The government has since enacted a 2 trillion yuan (US$290 billion) business tax cut, reduced social security contribution rates for businesses, and rolled out some subsidies for consumers to buy cars and home appliances.

The NDRC announced at the end of January a plan to boost consumption by providing subsides for purchases of energy saving and smart home appliances, including air conditioners, fridges and televisions.

In Beijing, the home appliance subsidy is around 8 to 20 per cent, but it is capped at 800 yuan (US$116) per unit.

The NDRC also mentioned continuing subsidies for new energy vehicles, while allowing local subsidies in rural areas.

Consumption accounted for 60.1 per cent of growth in the first half of 2019, compared to 19.2 per cent for investment and 20.7 per cent for net exports, data from National Bureau of Statistics showed.

Exports are expected to deteriorate after a meagre 0.1 per cent rise in the first half of the year, as the rise in the tariff rate on US$200 billion of Chinese goods from 10 per cent to 25 per cent in early May filters through the Chinese economy.

Investment is also projected to show only a weak rebound after rising 5.8 per cent in the first six months of 2019, as the government continues to clamp down on the financing for real estate developers.

This leaves the government counting on greater consumer spending to support the economy, with measures to boost consumption likely to be part of any increased policy stimulus.

The Politburo, China’s 25-member top leadership group headed by President Xi Jinping, is expected to hold its quarterly meeting on the economy before the end of the month and may propose new policies to shore up growth and employment.

However, the Chinese government needs to address a series of constraints which prevent the growing middle-class from buying more cars, home appliances and other consumer goods, analysts said.

The country’s household debt to gross domestic product, a widely used measure of debt, jumped to 52.6 per cent last year from 39 per cent in 2018, according to the Bank for International Settlements.

A study by Guotai Junan Securities found that household debt in the more prosperous coastal regions was particularly high, raising the question of how much spending power consumers there really have.

The household debt ratio was as high as 96 per cent in Xiamen, a coastal city in Fujian province, 76 per cent in Zhejiang province, 68 per cent in Shanghai, and 64 per cent in Guangdong province, the investment bank found.

“In the average household, about 60-75 per cent of income is used to pay home mortgage loans and basic daily necessities, while the rest is used to pay for education or medical bills, as well as saving for the future,” Guotai Junan chief economist Hua Changchun said this week.

Liu Xuezhi, a senior researcher at the Bank of Communications, said that, unlike moves to increase spending on major infrastructure projects, the government initiatives to boost consumption will not generate immediate results.

“It can’t be done overnight, but rather is long-term work,” he said. “Instead, it involves a variety of issues, including how to improve individuals’ income and control their debt level, as well as optimising domestic industries to provide better products and service” that consumers want to buy.