China turns to consumers to boost growth, but households are wary

Mint

7 days ago

To weather a trade war with the U.S., China is looking to its own consumers to keep the economy churning.
Beijing has made bolstering domestic consumption a top policy priority for the first time, promising efforts to boost household spending. In one initiative this year, the government allocated 300 billion yuan, equivalent to around $42 billion, to expand a program that pays shoppers to trade in old vehicles or electronics for new ones.
But while the program has boosted short-term economic activity, economists say it does little to rebalance a Chinese economy that has long favored manufacturing as a driver of growth. Economists and policy advisers have called on Beijing to address the deep-rooted impediments to consumption, including a threadbare social-welfare system that incentivizes households to save and a financial system geared toward channeling investment to manufacturing.
Meanwhile, an epic property bust, slowing growth, deflation and high youth unemployment are all weighing on the economy and curtailing consumers' inclination to spend.
The bid to rebalance the economy toward consumption is all the more urgent as a trade war with the U.S. pressures China's ability to export its way to strong growth.
'In the past, our finances mainly supported investing in projects. Now, we need to shift to investing in people," said Peng Sen, president of the China Society of Economic Reform, a state-affiliated think tank, at a recent economic forum.
At Meidu Home Appliances, a multistory retail store in the center of the southern city of Haikou, a red billboard, banners and colorful streamers outside its entrance recently advertised deals on everything from TVs to air conditioners to refrigerators—all products eligible for the government incentives.
Ma Dejun, a driver for ride-hailing app Didi, shopped for a new washing machine. He isn't earning much money from Didi these days, so the government subsidies are helping him make big-ticket purchases, he said. He also planned to buy a new electric scooter for around 3,000 yuan to take advantage of a subsidy for trading in his current three-year-old scooter.
'It motivates me to spend more," said Ma.
The incentives helped push retail sales of household electric and video appliances up more than 40% year over year in recent months, while sales of communication appliances have jumped around 30%, according to government data. Retail sales of consumer goods have risen overall, though growth dipped in April.
Household nominal consumption in the first quarter grew 5.2% year over year, compared with 4.5% in the fourth quarter. From January to April, more than 34 million consumers participated in the household appliances trade-in program, generating sales of 174.5 billion yuan, according to China's Commerce Ministry.
'Since the beginning of this year, policy initiatives have continued to yield results, with sales continuing to rebound, but the internal driving force for consumption needs to be strengthened further," a spokesperson for China's National Bureau of Statistics said last Monday.
The subsidies only go so far. At Meidu, a shopper with the surname Ou said working-class Chinese like herself are hesitant to spend money because wages are low and income hasn't increased. She welcomed the incentives, but said that 'if your TV isn't broken, you won't buy a TV just because of the subsidy." She left the store without buying anything.
Even in Haikou, which sits on the tropical island of Hainan known for its leisurely pace of life, parents were worried about their children's futures and others expressed concern about whether their adult children would get married. Local shopkeepers noted a slowdown in tourist activity.
Wu Shansheng, a father of two who produces and sells surveillance equipment, said sales are down from last year, as customers seek cheaper alternatives online. Government departments, formerly major customers, are also in cost-cutting mode. Wu's products aren't eligible for subsidies, like those offered for electric vehicles and smartphones.
In response, Wu has slashed prices, even if it cuts into his profits. Better to sell a little bit and make less, than get stuck with too much inventory, he said.
'Everyone feels like they don't have much money," said Wu.
China earlier this year released a plan to expand domestic consumption, including raising wages, increasing pensions, creating incentives for childbirth and stabilizing the stock and property markets. But policymakers have provided few specifics on how the initiatives would be carried out.
In the long run, transforming China into a consumption-focused economy would require far-reaching and costly reforms to build out its social safety net, boost incomes and restructure China's financial system to focus more on consumer finances and less on industrial investment, economists say.
Thin social programs, such as health insurance, have driven Chinese people to save for rainy days. China's gross domestic savings were 44% of GDP in 2023, compared with 19% for the U.S. and 27% for the world, according to World Bank data.
But rebalancing the economy toward consumption has been met with a lukewarm reception from Chinese leader Xi Jinping. Though he has made comments supporting efforts to boost consumption, Xi has given priority to manufacturing, especially in cutting-edge industries, and has resisted handouts to consumers, fearing they would lead to what he describes as 'welfarism."
Xi during a recent visit to a factory in Henan province emphasized the importance of manufacturing and self-reliance to China's development, according to state news agency Xinhua.
'China has always adhered to the path of developing the real economy…which has proven to be the right path," Xinhua quoted Xi as saying.
Grace Zhu contributed to this article.
Write to Hannah Miao at [e-mail]