China consumer is epitome of delayed gratification

Consuming problem. Chinese policymakers have been talking about rebalancing the economy 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 economic planning is hard to square with free-spirited spending. Recent stimulus policies suggest that Beijing is not that keen on ditching the old model.

Consumption accounts for roughly 75% of GDP globally with the remaining 25% coming from investment, according to the World Bank. Yet in the People’s Republic, consumption was responsible for just 53% of economic 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 not be sustainable. The $18 trillion economy’s ailing growth and deflation invites comparisons with the prolonged period of economic stagnation in Japan that started in the 1990s. To avoid this outcome, most economists agree that China will have to address the imbalance, probably by spending trillions of yuan to boost consumption and reinvigorate growth. By this yardstick, Beijing’s stimulus measures announced last month were a disappointment. Apart from pledging bigger support for low-income individuals and students to boost consumption, most of the efforts were aimed at reviving investment by ailing local governments.

Though authorities may yet unveil more dramatic policies, the reality to date falls far short of the rhetoric. As early as 2007, then-Premier Wen Jiabao had warned that a growth model heavily reliant on investment is “unbalanced, unstable and unsustainable”, and that an economic rebalancing towards consumption would be a top priority. In 2022, the 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 economic goals. Xi’s ambition is for the People’s Republic to double its GDP between 2020 and 2035. To achieve such a grandiose feat, the world’s second-largest economy will have to expand by close to 5% in each of the next 10 years. Yet if the balance of investment and consumption remains the same as today, economists at Carnegie China estimate that in such a scenario China’s share of global investment would rise by 5 percentage points to an astonishing 38%. Depending on the rest of the 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 the country to rise quickly from the ruins of World War Two. But in the 1980s the Japanese economy began to suffer from many of the same challenges that China is grappling with today. The government responded by cajoling savers to spend more.

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

Chinese think tanks and economists have studied Japan’s experience, in part as a cautionary tale. The problem, however, is that a system built on central planning cannot 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 the austerity drive also made affluent elites more cautious about flaunting their wealth.

This exacerbated the so-called “consumption downgrade” trend, whereby Chinese shoppers tightened their 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 their office. According to the National Bureau of Statistics, consumer confidence has sunk even further since the Covid pandemic. Much of this is linked to the ongoing slump in the real estate market. With the value of their most important household investment dwindling, many are reverting to their tradition of saving for the future.

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

When it comes to stimulating demand, authorities in Beijing are so far not showing the same level of intensity as they are planning for other national goals, such as achieving self-sufficiency in semiconductors. The 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.

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

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 Technology Co.

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

Context News

Consumption accounts for roughly 75% of gross domestic product globally with the remaining 25% driven by investment, according to the 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 the scale of consumption and investment to new levels, and fully establish a “sound domestic demand system” by 2035.