China Needs Consumer Stimulus

China is grappling with a significant economic challenge: boosting household spending to sustain growth amidst internal and external pressures. The nation's leaders recently signaled a shift towards enhancing consumer demand, marking a departure from decades-long reliance on exports and infrastructure spending. However, the incremental measures announced thus far may fall short of the substantial stimulus needed to revive the world's second-largest economy.

In recent efforts, Beijing has committed 150 billion yuan ($20 billion) in government debt to finance trade-ins on consumer goods such as appliances. This initiative is China's first debt-funded program aimed directly at nationwide household consumption. While this move is a step towards addressing chronically weak domestic demand, it represents just 0.12% of the gross domestic product (GDP). Analysts suggest that significantly more robust measures will be necessary to achieve long-term economic stability and growth.

China's pivot towards consumer-driven growth is driven by multiple factors. Trade tensions with the United States and other global economies, coupled with local government debt risks, have left Beijing with few alternatives. As the global economic landscape shifts, the traditional model of export-led growth is increasingly unsustainable. The authorities' growing wariness of debt-funded projects, due to the scrutiny on heavily indebted municipalities, further complicates the situation. Despite most fiscal stimulus still being directed towards investment, the diminishing returns on these investments highlight the need for a different approach.

Local governments have sold 1.49 trillion yuan ($200 billion) of special bonds used to fund stimulus in the first half of the year, amounting to just 38% of the full-year quota. This tight fiscal stance contrasts sharply with the urgent need for economic stimulation. The challenge lies in finding projects that generate stable income and provide sufficient returns on investment. The pool of viable projects is shrinking, raising concerns among economic advisers about the efficacy of continued investment-driven growth.

The export outlook for China is likely to worsen, especially if geopolitical tensions escalate. Former U.S. President Donald Trump, a current Republican candidate, has threatened tariffs of up to 60% on all Chinese goods if he returns to the White House. Such a scenario could significantly impact China's real economic growth, potentially reducing it by 0.3-0.4 percentage points next year and in 2026, according to Yue Su, principal China economist at the Economist Intelligence Unit.

China's household spending remains significantly lower than the global average, accounting for less than 40% of GDP compared to around 60% in many other countries. To revive consumption merely to its pre-pandemic levels would require an estimated 3 trillion to 8 trillion yuan ($400 billion to $1 trillion) in spending. However, the government's track record on delivering effective consumer stimulus is poor, raising doubts about the likelihood of achieving this scale of intervention.

Xu Hongcai, deputy director of the economic policy commission at the state-backed China Association of Policy Science, argues that boosting demand sufficiently might necessitate reallocating 5 trillion yuan from investment projects to consumers. While this would provide a short-term boost, long-term improvements require enhancing the income proportion of urban and rural residents by 20 percentage points.

The urgency to stimulate the domestic economy is underscored by increased external pressures. A more decisive domestic-focused policy and fiscal expansion could mitigate some of these effects. However, the Chinese government's cautious approach, emphasizing high-technology sector growth and manufacturing advancements, may not sufficiently address the immediate needs of boosting consumer confidence and spending.

China's real-estate market, a significant component of the economy, continues to struggle. The property slump, initiated by a policy-induced financial squeeze in late 2020, has left a glut of unfinished properties and eroded consumer confidence. Home sales and prices have continued to decline, with the value of new-home sales from the 100 biggest real estate companies plunging almost 20% from a year earlier. The International Monetary Fund (IMF) has recommended a substantial fiscal outlay to address this issue, but China's central government has so far resisted, asserting that existing policies are sufficient.

Local governments, heavily reliant on the sale of property usage rights for fiscal resources, face massive budgetary holes due to the real-estate slump. This has limited their ability to support economic growth and exacerbated confidence issues among consumers. The situation is further complicated by demands for back taxes from companies, impacting their earnings and overall economic stability.

China's consumer spending has been significantly affected by the property slump, compounded by the lingering effects of the pandemic. Retail sales in June were at their weakest monthly pace since December 2022. Huang Yiping, a member of the People's Bank of China's monetary policy committee, has called for a positive psychological shock to improve business and consumer expectations. However, the Chinese Communist Party's focus remains on technological advancements and manufacturing, potentially sidelining immediate consumer needs.

​In summary, China's economic challenges require more than incremental measures. A comprehensive and robust consumer stimulus is essential to address the underlying issues and ensure sustainable growth. The government's cautious approach, while understandable, may need to evolve to meet the pressing demands of the current economic landscape. As the world watches, China's path forward will significantly impact not only its own economy but also the global economic order.