To revive the economy, China wants consumers to buy better stuff
Summary
- It is offering them money to do so
Everywhere you look, the world’s politicians face tough economic choices. In many countries, they must raise taxes, cut spending or put up with high interest rates to keep inflation in check and make room for investment in the future. China is different. In the world’s second-biggest economy, inflation is too low, investment is excessive and interest rates are falling. The government’s most urgent economic task is to encourage citizens to loosen their belts, not tighten them.
“We should focus on boosting consumption to expand domestic demand," the Communist Party’s Politburo said on July 30th. It is right. The government’s economic-growth target for this year is “around" 5%. To meet it, demand and production must expand in tandem. Consumption accounted for most of the necessary increase in spending last year, as households returned to eating out and travelling after the pandemic. Their spending was also strong in the first three months of this year. But it has since begun to flag, putting the growth target in doubt.
Consumer confidence is low. Retail sales grew by only 2% in June, compared with a year earlier, even before adjusting for inflation. Sales of cosmetics and clothing fell. A survey by China’s central bank in April showed that over 60% of city-dwellers want to increase the amount in their savings accounts. Less than a quarter want to consume more.
To change their minds, the government has expanded a programme introduced in March. The scheme provides subsidies to households that renovate their homes and scrap old goods for shinier, greener replacements. Buyers of new electric cars will receive up to 20,000 yuan ($2,800). Other goods, including refrigerators and televisions, will attract subsidies of up to 2,000 yuan. The money for the scheme, which will amount to about 150bn yuan ($20bn), will come from long-term bonds sold this year by the central government. That will spare debt-ridden local governments an additional financial burden.
At a press conference for the policy, Xu Xingfeng of the Ministry of Commerce referred to cars, household appliances, home furnishings and catering as the “four guardian kings" of traditional consumption, a reference to the four protectors of the world in Buddhism. He urged local governments to promote energy-saving appliances, such as water-efficient dishwashers, and more sophisticated home products, such as “smart" toilets. The Buddha, of course, taught that desire for material things was the source of suffering. But he never owned a smart toilet.
Will the scheme make a difference? The amount earmarked by the central government is the equivalent of only 0.3% of the country’s annual retail sales (although it is meant to be spent in a shorter interval). Even if it succeeds in the near term, it may cannibalise later sales. America’s cash-for-clunkers programme, introduced in 2009 during the global financial crisis, prompted 360,000 extra car purchases in two months, according to Atif Mian of Princeton University and Amir Sufi of the University of Chicago. But because subsequent sales were correspondingly weak, the net effect was almost zero by March 2010.
Such schemes aim to prise open wallets. Another approach to raising consumption is to fatten those wallets. The Politburo also promised to “increase residents’ income through multiple channels", without specifying how. Households’ biggest source of income is wages. But Goldman Sachs, a bank, estimates that urban wages grew by only 2.7% year-on-year in the second quarter, compared with growth of 5.6% in the first.
Households can also earn income from their assets. For most Chinese, their biggest asset is housing. A survey in 2019 by the central bank showed that flats and other residential property accounted for 60% of the average city-dweller’s wealth. The ongoing decline in China’s house prices will, therefore, have damaged consumer morale. But because few households rent out their flats, even when they own several of them, the property slump may have inflicted surprisingly little harm on their cashflow, points out Adam Wolfe of Absolute Strategy Research, an advisory firm.
What about households’ other assets? Building on the central bank’s survey, Mr Wolfe has estimated the average city-dweller’s holdings of stocks, bonds, deposits and other financial assets. He calculates that the yield on this portfolio (including dividends and interest payments) has halved since 2019(see chart). This is partly because regulators have cracked down on the riskier, more rewarding, products offered by shadow banks. It is also because households’ eagerness to save, amassing deposits and bonds, has reduced the return to doing so. The decline in yields is, then, a consequence of weak consumption. And by eroding household income, it could also be a further cause of it.
In steering the economy, China’s rulers have powers and privileges other politicians can only dream of. They face no political opposition. The central bank is subservient. The government owns most of the commercial banks and many other firms, too. Yet China’s leaders have failed over the past two decades to rebalance the economy decisively towards consumption. And they will probably fail over the rest of this year to raise household spending enough to meet their growth target. Perhaps it is time for them to trade in their old economic policies for new ones.
