Cautious spending: A customer shops for vegetables at a supermarket in Nanjing. Private consumption is relatively low in China, accounting for just about 40% of the economy, versus around 55% in culturally-frugal Japan and Germany, and 63% in Brazil. — AFP
CHINA’S president Xi Jinping has finally realised that in a global trade war, the economy with the most powerful consumer base wins.
Boosting domestic consumption is the government’s top economic priority this year, as premier Li Qiang made clear at this week’s National People’s Congress.
In 2024, consumer spending contributed to only about 30% of economic growth, versus 68% at the onset of 2018, when US president Donald Trump started his first trade war.
Most of the 5% expansion came from exports, which makes the nation vulnerable to new tariffs imposed by Washington and the likes of Mexico, where Chinese companies are relocating for easier access to American end-users.
Consumption’s contribution to gross domestic product or GDP growth is on the decline.
In theory, boosting consumer demand would be a low-hanging fruit. Private consumption is relatively low in China. It accounts for just about 40% of the economy, versus around 55% in culturally-frugal Japan and Germany, and 63% in Brazil.
However, faced with a weak job market and a prolonged property downturn, consumers are hunkering down.
Household savings more than doubled from 2018 to about 151 trillion yuan (US$20.7 trillion) last year, even as banks repeatedly cut deposit rates. How can policymakers encourage the Chinese to reopen their wallets?
Economists have floated the idea of using strong fiscal measures. With a 3% rise in households’ savings rate since 2021, the government needs to boost its deficit by at least this much – every year – to fill the loss in aggregate demand, suggested Alpine Macro, a research outlet.
Beijing is clearly not ready to do that. The government set this year’s on-budget fiscal deficit just one percentage point higher. It plans to use 300 billion yuan from an off-budget special sovereign bond issue to fund consumer trade-in programmes, but that’s peanuts for the 135 trillion yuan economy.
It’s understandable: With government debt pile the size of the economy, Xi doesn’t want a fiscal crisis.
Policymakers are starting to embrace the idea that the consumer space has a supply – not a demand – problem.
In simpler terms, people want to spend, but the economy does not produce things that they desire. Young people, in particular, are undergoing a cultural shift.
Unlike their parents, the lie-flat generation grew up with plenty of goods. Instead of getting another Gucci bag, they want to travel, attend concerts and experience life.
Indeed, there’s statistical evidence to support the idea that China’s services sector is under-developed. It accounted for only 54% of households’ final consumption in 2019, the latest data available, according to research firm Gavekal Dragonomics.
This pales in comparison to the 70% to 80% range in high-income countries, and more than 60% in other developing nations like Brazil.
This perhaps explains why Beijing has been allowing more cultural exchanges lately. American rapper Kanye West, now known as Ye, performed on the southern island of Hainan last summer, prompting the New York Times to ask why a notoriously prickly government would let in the notoriously provocative musician.
Later this month, John Wick: Chapter 4, the most recent smash-hit installment of Keanu Reeves’ brutal action franchise, will make a surprise run in China, two years after its original worldwide release.
Interestingly, no cuts were made to the R-rated film, a highly unusual move from the nation’s censors.
China has finally realised that big money can be made in the services industry, with local officials likening top-tier artists such as Taylor Swift to “walking GDP”.
Starved of cultural stimulation, young people are happy to splash. Ticket sales for Ye’s single show last summer reached US$7.2mil, a lot more lucrative than in the United States or Europe.
Box office earnings for animation film Ne Zha 2, released late January, have topped US$2bil.
This plan is perfect. By developing the services sector, especially in entertainment and tourism, local governments can earn tax revenue and boost their economy. China won’t go off the fiscal cliff, either. It’s stimulus, for free.
There’s a big caveat, though. Xi needs to have the stomach for alternative worldviews and lifestyles.
To empower consumers and get them to spend, Beijing must accept that top artists are often provocative and despise censorship.
Xi, are you truly ready for John Wick, unfiltered? — Bloomberg
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. The views expressed here are the writer’s own.
