China’s first-half economic growth has received much attention. While significantly higher than the growth rates of developed countries and major developing countries such as India, Vietnam and Brazil, China’s 5.5% GDP growth still disappointed many.
This is because the Covid-19 pandemic severely slowed China’s economic growth, which resulted in 3% GDP growth in 2020 and seriously affected production potential. People were expecting a strong recovery when anti-Covid measures were lifted but the 5.5% growth rate still failed to meet many people’s expectations because of the low base from the prior year.
Relying on domestic demand growth
We can understand the difficulties facing the Chinese economy in four ways. Externally, global economic recovery remained weak in the first half of the year, with major economies generally seeing below-potential growth, thus affecting global investor confidence.
At the same time, intensifying geopolitical risks in recent years have also dealt a big blow to the normal operation of the global supply chain and the international trade system. These factors affected China’s exports in the first half of the year, with net exports making a negative contribution to GDP growth.
Weakening expectations, and the lack of both confidence and momentum are the main issues affecting economic growth.
Domestically, it is unlikely that the economic impact of the pandemic will vanish in the short term, and people’s apprehension and worries are still lingering, influencing their desire to invest and consume.
Furthermore, policies implemented in China over the past few years have caused panic and misinterpretation, dealing a blow to market expectations and confidence, with the private sector bearing the brunt of the hit. Weakening expectations, and the lack of both confidence and momentum are the main issues affecting economic growth.
Meanwhile, longstanding structural problems facing the economy have become more obvious amid a sluggish economy. Over the past four decades, China’s economic growth has been driven externally by exports and internally by investments. But China can no longer count on exports to drive economic growth. Thus, the country is seeking to boost domestic demand.
But the domestic investment landscape is very different from what it used to be. Traditional infrastructure investment is nearing its peak, while the role of the property sector as a pillar of the Chinese economy is waning. Although the transition to new models for infrastructure and real estate is a step in the right direction, it cannot be accomplished quickly.
In the short term, it [domestic consumption] can at least ease some economic pressure and create a new window of time for the economy’s long-term structural adjustment.
Under such circumstances, China is shifting its focus to boosting domestic demand. Although the pandemic had greatly inhibited household spending, consumption grew dramatically after anti-Covid measures were lifted, with final consumer expenditure contributing a whopping 77.2% to China’s economic growth in the first half of the year, far greater than the contribution of investments and net exports.
Thus, further tapping into China’s consumption potential will greatly help stabilise the Chinese economy. In the short term, it can at least ease some economic pressure and create a new window of time for the economy’s long-term structural adjustment.
Support policies to restore confidence
Recently, the Politburo of the Chinese Communist Party and other relevant departments introduced a wide-ranging plan to boost consumption for big-ticket items such as cars, electronics and household appliances, as well as various services including sports, entertainment, culture and tourism.
Indeed, large-scale fiscal stimulus is unlikely due to the growing debt risk of China’s local governments. China also needs to be cautious about its monetary policies amid the US’s high-interest rates and the strong dollar.
Thus, the current plan to boost consumption takes the form of support policies aimed at restoring confidence. Rather than handing out cash subsidies such as consumption vouchers, the plan uses measures such as advancing urban renewal and developing the private sector, to promote employment and stabilise the economy.
Since various local governments are also implementing localised policies to encourage consumption, these large-scale measures are expected to be effective in promoting economic growth in the second half of this year.
Stimulating consumption is crucial for long-term economic structural improvement. While the contribution of household consumption to GDP in China has generally grown, it still remains below 39%, a far cry from the global average. This has led to the Chinese economy’s overreliance on exports and investments, which is an unsustainable model.
To ensure long-term development, China has to significantly boost household consumption and truly make it one of the three pillars driving economic growth. Increasing consumption also provides a new outlet for excess domestic production capacity and offers new profit security for Chinese enterprises. Without demand from the consumer market, companies would lose the drive for development and innovation.
... sustainably boosting household consumption will rely on the growth of private income, primarily wages, business income and asset income.
Increasing household income key to sustainable growth
While there are short- and long-term benefits to promoting consumption demand, sustaining demand growth will prove to be a challenge. In the long run, sustainably boosting household consumption will rely on the growth of private income, primarily wages, business income and asset income.
The current challenge in China is that household income growth is still lower than pre-pandemic levels. Data from the National Bureau of Statistics show that in the first half of 2022 and 2023, per capita disposable income of households increased by 5.0% and 6.5% respectively, lower than the nearly 9% annual growth rate before the pandemic. Slower income growth leads to insufficient intrinsic momentum for sustained consumption growth.
The underlying factor supporting wage growth is employment. However, China faces significant challenges in employment, particularly for young people and migrant workers. Developing the economy, especially by supporting private enterprises, is key to improving income and the employment situation.
... increasing household income would require multi-pronged efforts from various angles including strong support for the development of medium, small and micro enterprises and job creation, stabilising the real estate market, and harnessing the wealth effect of the capital market.
Related to this is the business income for ordinary people, as the impact of the pandemic on small and micro enterprises has hindered the growth of their business income. Meanwhile, China’s stock market has also seen a decline over the past couple of years, greatly affecting the asset earnings of over 200 million retail investors. The sluggish real estate market has also significantly lowered income expectations for residents who rely on real estate for investment returns and rental income.
So, increasing household income would require multi-pronged efforts from various angles including strong support for the development of medium, small and micro enterprises and job creation, stabilising the real estate market, and harnessing the wealth effect of the capital market. These measures constitute a long-term strategy for continuously raising overall household income and boosting consumption.
Another important issue is how to stabilise and increase the people’s marginal propensity to consume, or the proportion of income that people are willing to spend rather than save. This is largely dependent on their expectations for the future.
In recent years, the Chinese have shown an excessive tendency to save, due to the influence of the pandemic, along with the ageing population and inadequate social security system. The elderly are less willing to actively consume while young people face difficulties in finding employment, both of which have negative effects on consumption.
Essentially, it is crucial to sustainably boost China’s consumption, but there are also significant challenges. It calls for a new model in China’s economic development, and may even require reforms and adjustments to the entire social security system. It is not only about increasing the quantity of consumption, but also its value, to align with the overall high-quality development of the economy.
Related: China’s economy lacks foundation for expanding consumption | Low consumer confidence will dampen China's push to boost consumption | China’s rising property prices have serious social consequences | Can China rally private enterprises and boost domestic demand?