China’s Consumers Fall Behind Even as Its Economy Marches Forward
One thing is missing from China’s otherwise remarkable economic recovery: a strong rebound in consumer spending.
Even though China was the only major economy to expand during the Covid-19 pandemic last year, its growth remains highly unbalanced, relying heavily on exports of manufactured goods to the U.S. and elsewhere. Domestic consumption has lagged, with retail sales shrinking 3.9% in 2020 from the previous year and demand for imported goods falling slightly.
There are many reasons for the weakness. While China’s unemployment rate never shot up as much as unemployment did in the U.S. and Europe, many employers cut salaries or hours, leaving consumers anxious. Many opted to save more—a common tendency in China, which has long had a high savings rate.
China’s government also didn’t hand out checks to consumers as the U.S. did, choosing instead to focus stimulus on helping factories and other businesses.
Many economists now believe spending weakness will persist in 2021. If it does, it could mean Chinese demand does less than hoped to help lift other economies out of trouble this year.
It would also set back China’s long-term goal of building an economy that depends less on investment and factories, which drove China’s economic miracle since the 1980s but are seen as offering diminishing returns over time, including this year. The export growth that lifted China in 2020 could ebb in 2021, as Western consumers resume travel and spending in restaurants and potentially buy fewer toys and gadgets from China.
“You have real restraints on where this recovery could go in China and how much its economy can speed up, if [the government] doesn’t do more on the consumption side,” said Leland Miller, chief executive officer of China Beige Book, a research firm that conducts private surveys on the Chinese economy.
Yan Ling, a 25-year old teacher living in the central city of Chongqing, said she plans to keep cutting back on what she calls unnecessary goods, such as snacks and clothes, in part because she worries that a possible resurgence of the pandemic could threaten her job stability. While her income has returned to its pre-pandemic level, her monthly salary dropped to only about $460, or a third of its usual level, during the height of the pandemic last year, as the elementary school closed temporarily.
“The pandemic made me realize the importance of saving,” she said.
China’s economy still has considerable momentum, with growth that is expected to hit 7% or more this year, far outpacing the U.S. and other major economies. Some economists believe China’s growth could turn into a virtuous cycle that eases consumers’ concerns and fuels more robust spending.
Wealthier Chinese, like their U.S. counterparts, have largely kept buying, providing a rare source of growth for some Western brands. Munich-based luxury car maker BMW saw its profit rise almost 10% in the third quarter, thanks to a strong recovery in demand from Chinese buyers. Italian luxury-goods house Prada reported a 52% sales surge in China in the second half of 2020.
But China failed to overtake the U.S. as the world’s biggest retail market in 2020 as some analysts had expected, after years of narrowing the gap and despite having a much larger population. Retail sales in the U.S. are estimated to have edged up slightly in 2020 to $6.24 trillion, based on data from the Census Bureau.
Economists say Covid-19 has also exacerbated structural problems that have long curbed Chinese consumers’ spending power, and correcting them requires strong political resolve. Those issues include a widening wealth gap, a heavy reliance on inefficient state-owned enterprises, and the lack of a comprehensive social safety net, which makes many families save more for emergencies.
Although China’s household savings rate edged down from a peak of 25% of gross domestic product in 2010 to 23% in 2018, it remains far above the global average, according to the International Monetary Fund. A survey by China’s central bank in the third quarter of 2020 found that 50% of households said they plan to save more, up from 45% a year earlier, while fewer said they intend to spend or invest more.
A recent outbreak of Covid-19 cases in Hebei province and fresh lockdowns have added to fears that retail sales will soften during China’s coming Lunar New Year holiday, typically a strong season for consumer spending.
“It’d be highly unlikely for consumption to return to pre-pandemic level in 2021,” said Dan Wang, chief economist at Hang Seng Bank China.
One concern is that China’s job market remains on unstable ground. While China’s urban employment rate recovered to pre-pandemic levels by September, estimated workloads were still down by more than 40% from normal, according to Gan Li, a professor of economics at Texas A&M University.
Average incomes among private-sector employees dropped 29% in September from a year earlier, his research showed.
“Low workload reflects a depressed demand, which means that recovery in the job market is still quite fragile,” said Mr. Gan.
Chen Yong, a fuel salesman at China National Petroleum Corporation in Hebei province’s Qinhuangdao city, said his annual income dropped to about $32,340 from around $46,200 before the pandemic, as clients such as gas stations and factories looked for cheaper supplies elsewhere.
“I’d typically buy Burberry bags and clothes every year, but not in 2020,” said Mr. Chen, who is 38.
Another factor that could limit spending going forward: a continued rise in housing prices, which is stretching affordability for younger families and making them dedicate more income to housing.
Studies by Mr. Gan at Texas A&M show that a 5% gain in China’s housing prices leads to a 4.5% decline in consumption among families saving up to buy houses, though it could boost spending among existing homeowners to a smaller extent. Overall, it should depress total spending by 1.8%.
Edward Liu, who is eager to buy his first apartment in Shanghai, said he is holding back on spending to save for a down payment.
“People around me talk about buying properties nearly every day,” said Mr. Liu, 28, who works as an analyst at a brokerage firm and hasn’t seen any negative impact from the pandemic on his income. “Anxiety is highly contagious.”
Chinese authorities have suggested in recent months that they will take steps to increase consumption this year with what some officials have described as “demand-side reforms,” though little detail has been revealed.
“You’d need to keep allocating resources, whether it is land, credit or more talent towards efficient companies,” said Jingyang Chen, China economist at HSBC. “But of course there’d always be some resistance to this kind of reform.”