The Flanders-China Chamber of Commerce (FCCC) organized a webinar on 'China's Consumption Challenge', on April 30, 2024. This briefing covered the key consumption trends and realities in China, Chinese current policy agenda and key trajectories, and signposts and red flags, what guideposts should be monitored to inform business planning? Ms. Gwenn Sonck, Executive Director of the Flanders-China Chamber of Commerce introduced the webinar and moderated the Q&A session. Keynote speaker was David Hoffman, Senior Advisor of The Conference Board of Asia and its China Center for Economics & Business in Beijing. Below is a summary of Mr. Hoffman's presentation.
Why is shifting to consumption-led growth so hard for China? The ongoing decline of the Chinese real estate market has significantly reduced Chinese demand, which the government tries to fill with increased industrial production, but ultimately trade tensions will limit China's ability to increase exports. Household consumption is hindered by negative real interest rates. However, China can implement reforms to make consumption the primary growth driver, but those reforms require systemic change and will take time. Meanwhile, growth through innovation will be difficult and subject to pricing and margin pressures.
The problem is that many MNCs have doubts about the official 5.2% growth rate, which is mainly the result of state sector investment rather than increased consumption. The decline in the real estate sector is showing deep structural weaknesses in household consumption and industrial overcapacity. The credit-fueled, investment-led growth has ended and new growth drivers will require major reforms. Foreign investors are advised to watch policy measures that would really increase household consumption. The needed reforms are feasible but require major changes in the political and economic system, according to Mr. Hoffman.
Household consumption in China is structurally impaired as Chinese households have a relatively low share of the national income and therefore their capacity to consume is limited. A recent study estimates the number of Chinese “high-income households” with an annual income over CNY160,000 at 148 million in 2022 and predicts 200 million such households by 2025. Most Chinese households are far from entering the high-income group. However, much household wealth is hidden as incomes are underreported and taxes evaded.
Pivoting towards consumption-led growth is hard because household consumption is at odds with the investment-led growth model and its beneficiaries. The repression of household income has been fundamental to enable the state-led, investment-driven growth model. This economic legacy needs to be adjusted if consumption is to emerge as a durable growth driver in the future. Chinese households earn interest rates on their savings in Chinese banks that are typically below the inflation rate and much of the loans to the state sector are non-performing. Massive industrial subsidies to state-owned or controlled enterprises constitute a transfer payment from the household sector to the corporate sector. The key point is that China’s industrial plan is largely funded at the expense of households and consumers. Chinese households also subsidize local governments and companies through their purchase of real estate, as the sales of land leases are a key source of fiscal income for local governments. Many analysts are confident that the housing correction will not destabilize the Chinese banking system, but a huge portion of the wealth of Chinese households is exposed to real estate.
Another key constraint on the future of Chinese consumption are the more than 700 million low-educated, low-income people in the current Chinese workforce. Over 63% of China’s current workforce is unskilled with only middle school-level education or below and no country in modern history has escaped the middle-income trap with high-school attainment rates below 50%. Automation will not solve this problem, nor will labor exports via the Belt and Road Initiative or the expansion of the ‘gig economy’.
The good news is that China has the policy resources and capabilities to enduringly elevate consumption as a major growth driver. While the reforms involved would take considerable time to yield dividends, they may be expected to be greeted with enthusiasm by domestic and foreign investors. The bad news is that China’s leading group doesn’t appear to embrace the consumption imperative. Instead of embarking on structural reforms that would address the problems and enable consumption to rise, the leadership is doubling down on developing strategic manufacturing sectors, not consumption, as the key growth driver of the future. The reforms needed, such as fiscal transfers and redistributions to households via the tax system, public service benefits, social security entitlements, or other means – are seen as welfarism.
Key policy signals for businesses to look out for include movement on tax reform, local government finances, social security provisions and policies to address China's undereducated. The final bit of good news is that China’s leadership has undertaken real reforms in the past that have transferred wealth and effectively lifted “the masses.” It’s not impossible or improbable that meaningful reform won’t happen again. Ironically, to enable the required consumption growth, and a more sustainable economic model, China just has to become more ‘socialist’ in its support for Chinese households, Mr. Hoffman concluded.
A Q&A session concluded the webinar.
