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China's ‘Cash-for-Clunkers' Underlines Need for Structural Reform

China's plan to get consumers spending again may be working a little too well. Policymakers' rollout of subsidies for smartphones, home appliances, cars and a host of other products have spurred a long sought-after pickup in spending. But the funds needed to keep it going are running out faster than planned. It Was the World's Coolest Air Conditioner—Until the Mold Recall Anne Wojcicki Wins Bidding for 23andMe The Frenzied Pursuit of Wall Street's Low-Profile All-Stars Walmart and Amazon Are Exploring Issuing Their Own Stablecoins Why Superintelligent AI Isn't Taking Over Anytime Soon Many regional authorities put a brake on subsidies in recent weeks after shopping sprees drained the program's accounts faster than expected. The timing is particularly bad, as a major shopping holiday–'618' –is around the corner. 'Without these incentives, consumer enthusiasm will wane,' said Sarah Tan, economist at Moody's Analytics. She expects the pause on subsidies will dampen retail sales growth. China's state planner has given local authorities roughly half of the annual $42 billion quota for the program, under which consumers get subsidies to trade in used goods for new ones. Analysis by Huaxi Securities shows that over half of the total had been deployed as of May. For the month of June–during the '618' shopping festival–around $7 billion would be needed to sustain the subsidies before they were pulled back, the brokerage said. This suggests that 70% of the planned spending would be expended in the first half of the year. Glitches can be fine-tuned, but they may also reflect the limitations of such stimulus, Morgan Stanley economists said. A similar effort in the U.S.–the 'Cash-for-Clunkers' program to get Americans to trade in old cars–crowded out smaller dealers, distorted the market in favor of subsidized products, and had limited effect on broader spending, they wrote in a note. China watchers have long warned that without accompanying structural reform, subsidies would be at best a temporary fix. The fast depletion of funds suggests the policy win may be even more short-lived than expected. Sales growth in categories such as sports equipment, office supplies, home appliances, and furniture in January-April topped 20% from the same period a year earlier, Goldman Sachs economists calculated. But while shoppers rushed to buy eligible products, tepid national inflation figures signal that consumer sentiment remains subdued amid a protracted property downturn and job market woes. Even if China's central government, which provides the bulk of the trade-in money, beefs up the subsidies, bigger policy moves are needed to keep consumption humming. 'The trade-in scheme is a temporary, bandaid solution…and doesn't address the underlying reason for Chinese households not spending,' said Tan at Moody's Analytics. Better job prospects and a sturdier social safety net are needed to pump up consumer confidence sustainably, economists say. The program is pulling forward purchases, but without a pickup in household incomes, it is 'encountering diminishing returns,' Gavekal Dragonomics' Ernan Cui wrote in a note. It would seem that Beijing agrees. An article over the weekend in the Economic Daily, a newspaper affiliated with China's State Council, called for longer-term reform to improve household incomes and boost consumption. Subsidy stimulus is not aimed at 'emptying wallets' but at helping consumers with purchases, it said. Beijing has made repeated pledges to pivot the economy toward a more consumption-driven model but progress has been slow. Markets will be watching to see what officials do to try to lock in consumer gains. Just extending the subsidies is unlikely to be enough. 'Repeated extensions of subsidies risk creating the worst kind of stimulus program: one that entrenches expectations of permanent fiscal subsidies while producing little change in consumer behavior,' Cui said. Write to Singapore editors at singaporeeditors@ Tax Breaks for 529 College-Savings Plans Expand in GOP Tax Bill The Only Remedy for Intel's Woes May Be a Breakup The World's Largest Meatpacker Finally Makes Its NYSE Debut Stocks Fall, Oil Prices Surge After Israel Attacks Iran Your Electric Bill Is Rising Faster Than Inflation. Here's Why.