China consumer is epitome of delayed gratification

Consuming problem. Chinese policymakers have been talking about rebalancing ecomy from investment and exports towards consumption for more than two decades. Yet as President Xi Jinping’s austerity campaign and a crackdown on consumer finance have shown, a collectivist approach to ecomic planning is hard to square with free-spirited spending. Recent stimulus policies suggest that Beijing is t that keen on ditching old model.

Consumption accounts for roughly 75% of GDP globally with remaining 25% coming from investment, according to World Bank. Yet in People’s Republic, consumption was responsible for just 53% of ecomic output in 2022 while investment took a 43% share.

Authorities in Beijing realise that a growth model which relies heavily on fixed-asset investment and exports may t be sustainable. $18 trillion ecomy’s ailing growth and deflation invites comparisons with prolonged period of ecomic stagnation in Japan that started in 1990s. To avoid this outcome, most ecomists agree that China will have to address imbalance, probably by spending trillions of yuan to boost consumption and reinvigorate growth. By this yardstick, Beijing’s stimulus measures anunced last month were a disappointment. Apart from pledging bigger support for low-income individuals and students to boost consumption, most of efforts were aimed at reviving investment by ailing local governments.

Though authorities may yet unveil more dramatic policies, reality to date falls far short of rhetoric. As early as 2007, n-Premier Wen Jiabao had warned that a growth model heavily reliant on investment is “unbalanced, unstable and unsustainable”, and that an ecomic rebalancing towards consumption would be a top priority. In 2022, ruling Communist Party published an all-encompassing directive calling for efforts to establish a “sound domestic demand system” by 2035.

Such a shift seems essential for China to hit its ecomic goals. Xi’s ambition is for People’s Republic to double its GDP between 2020 and 2035. To achieve such a grandiose feat, world’s second-largest ecomy will have to expand by close to 5% in each of next 10 years. Yet if balance of investment and consumption remains same as today, ecomists at Carnegie China estimate that in such a scenario China’s share of global investment would rise by 5 percent points to an astonishing 38%. Depending on rest of world to absorb such an increase in production by China would inevitably ratchet up trade tensions.

Japan’s experience offers a fresh perspective on China’s growth problem. Low consumption and high savings generated by workers enabled country to rise quickly from ruins of World War Two. But in 1980s Japanese ecomy began to suffer from many of same challenges that China is grappling with today. government responded by cajoling savers to spend more.

A strong currency reinforced shift by disadvantaging exports and encouraging consumption. This was part of thinking behind Japan’s decision to sign 1985 Plaza Accord, which revalued yen against U.S. dollar. A year later, Tokyo published  Maekawa Commission report that called for rebalancing ecomy towards consumption. Even n, according to World Bank, it still took Japan 17 years to raise consumption share of GDP by 10 percent points to a level close to global aver. Japan’s “lost decades” following collapse of a massive asset price bubble did t help shift. But drawn-out transition also shows challenges of making big ecomic adjustments quickly and smoothly.

Chinese think tanks and ecomists have studied Japan’s experience, in part as a cautionary tale. problem, however, is that a system built on central planning cant engineer a free-spirited consumer society. Xi’s record is hardly encouraging. Shortly after taking charge in 2013 he launched a sweeping campaign against graft and gluttony. That rightly put an end to boozy banquets and expensive gifts for party officials. But austerity drive also made affluent elites more cautious about flaunting ir wealth.

This exacerbated so-called “consumption downgrade” trend, whereby Chinese shoppers tightened ir belts. For instance, many white-collar workers would happily switch from coffee chain Starbucks to its cheaper local rival Luckin, or even a coffee machine in ir office. According to National Bureau of Statistics, consumer confidence has sunk even furr since Covid pandemic. Much of this is linked to ongoing slump in real estate market. With value of ir most important household investment dwindling, many are reverting to ir tradition of saving for future.

Authorities have hardly helped. In 2020, Ant Group abruptly cancelled its blockbuster initial public offering, in part because financial regulators were worried that online lender, an offshoot of Alibaba e-commerce group, encourd young people to borrow and spend beyond ir means. crackdown slammed brake on growth in consumer finance, an industry that helps fuel individual spending in Western ecomies. Since n, Alibaba has even scaled down its annual Singles’ Day shopping extravaganza.

When it comes to stimulating demand, authorities in Beijing are so far t showing same level of intensity as y are planning for or national goals, such as achieving self-sufficiency in semiconductors. government has earmarked up to 300 billion yuan ($42.5 billion) to help small and medium-sized businesses make upgrades and trade in equipment. This programme is tepid in size and is anyway more likely to boost production than demand.

July garing of Communist Party leaders for so-called Third Plenum meeting was also short on new measures. A 22,000-character policy document only reiterated intent to develop a “complete domestic demand system”, creating a virtuous cycle in which “consumption and investment promote each or”.

This suggests Xi and his ministers are still leaning heavily on investment in industries such as electric vehicles and batteries, exemplified by new corporate champions such as $114 billion BYD and $152 billion Contemporary Amperex Techlogy Co.

True, investment-led approach has served People’s Republic well for several decades. Right w, country is showing little sign of adopting a “whatever it takes” approach in steering its ecomic future towards consumption. Even if it does, rebalancing act will t be easy.

Context News

Consumption accounts for roughly 75% of gross domestic product globally with remaining 25% driven by investment, according to World Bank. Yet in China, consumption accounts for just 53% of GDP while investment takes a 43% share. In a policy document published in 2022, China called for efforts to raise scale of consumption and investment to new levels, and fully establish a “sound domestic demand system” by 2035.