With China’s economy clearly underperforming, the air in Beijing is rife with talk of stimulus. A July 23 meeting of the Politburo offered some broad guidelines for action, with surprisingly little specificity. Chinese authorities have used a well-worn playbook to address cyclical problems in the past, typically featuring support to infrastructure spending, property investment, and exports. The problem today is that most elements of this approach are close to being tapped out.
Yes, there are always more roads and high-speed rail lines to build in the vast expanse of Chinese geography, but the bulk of the economically active segment of the nation is already physically connected. Property has become more of a Japanese-like risk rather than a necessity of support for ongoing urbanization. And with global trade weak and the West keen to disengage from China—it doesn’t really matter whether you call it decoupling or de-risking—the export stimulus options also seem limited.
That brings us to one of my favorite topics, the missing Chinese consumer. The imperatives of consumer-led Chinese rebalancing have been a key focus of my last two books, my “Next China” course at Yale, and countless articles and speeches of mine over the past 15 years. Starting with former Premier Wen Jiabao in 2007, the Chinese consumer is invariably a focus of Chinese policy pronouncements. Outgoing Premier Li Keqiang, in his final “Work Report” to the National People’s Congress last February, ranked the expansion of domestic demand—especially consumption—at the top of his list of key priorities for 2023. But it was a hollow endorsement, at best, with only vague references to consumer demand targets such as big-ticket items and services.
On July 31, a week after the Politburo meeting noted above, China’s State Council upped the ante on a stimulus plan targeted at Chinese consumers. Reflecting what it modestly dubbed “General Secretary Xi Jinping’s scientific judgment on the economic situation,” the plan featured 20 measures aimed at boosting consumption, ranging from support to big-ticket items such as cars and houses (gulp) to adding elevators to older apartment buildings and encouraging local tourism. Significantly, the consumer stimulus was unveiled by National Development and Reform Commission (NDRC), the State Council’s principal economic manager and the modern-day incarnation of the old Soviet-style State Planning Commission.
Therein lies the problem—a consumer stimulus that reflects the planning mindset of social engineering rather than the incentives that could bring discretionary consumption to life as an active force in driving the Chinese economy. In essence, the 20 measures of the NDRC are more about supply than demand. Yet Chinese consumers don’t need to be directed by government planners at specific items to buy. They need to have the wherewithal and the confidence to buy whatever they want.
This not hard science. Basic macroeconomics points to three building blocks to discretionary Chinese consumer demand—jobs, wages, and a reduced saving propensity. Job support has come from the ongoing development of what had been an embryonic Chinese services sector; unfortunately, this has been offset recently by a sharp surge of youth unemployment above 20%. Wage support has come from ongoing rural-to-urban migration, with urban workers earning approximately two and a half times those in the countryside. The combination of employment growth and wage leverage has underpinned the expansion of labor income, which has risen to about 60% of Chinese GDP (Note: all statistics in this piece are from the IMF’s latest Article 4 report on China).
The basic macro problem is that insecure Chinese families save a disproportionate share of labor income, keeping the household saving rate close to 35%. Unfortunately, the 20 measures of the NDRC don’t speak to the sources of that insecurity—namely, China’s long deficient social safety net (i.e., healthcare and retirement). Until, or unless, Chinese policymakers address the persistence of fear-driven precautionary saving, they will be pushing on a string to stimulate a consumer sector that now makes up less than 38% of its GDP. And notwithstanding the new plan of 20 measures, China’s consumers will remain missing in action.
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