China’s consumer waves are all spent

Consumerism in post-1978 China has ridden five waves: from finding a solution to food shortages; to owning the “new big three” (refrigerator, colour TV and washing machine); spending more on information; buying automobiles; and finally, real estate. All the swells are now spent, according to Renmin University economist Xiang Songzuo.
Using stimulus to reverse the first annual decline in car sales in at least two decades or encouraging households to buy new appliances on credit aren’t lasting solutions. Giving up on private consumption doesn’t make much sense either.
Xiang argues that switch from investment, exports to personal spending and services has thrown up more negatives than positives. That isn’t a valid criticism. If nothing else, the shift in emphasis put a lid on external imbalances, which used to show up in bloated current-account surpluses China ran against the rest of the world.
Those are now history. But things won’t be on an even keel internally as long as the Chinese are saving 30% of their disposable incomes. Consumption has to rise further in order to curb the supply of surplus funds chasing yield. Only then will the overflow of credit start to recede meaningfully.
Invoking the East Asian culture of thrift to explain China’s high household savings is unhelpful. The problem isn’t so much that the rich set aside half their incomes, but that even the poorest households squirrel away 20 percent. Elsewhere, the lowest-income families typically spend more than they earn, and taxpayers subsidise the gap.
The People’s Republic is different because with state-owned enterprises retreating from providing social services to their workers, and taxpayers not stepping up to the plate, low-wage earners have had no option but to make bigger provision for education and health care.
The 30% savings rate for the poorest 10% is reversible, considering that even at the time of China’s 2001 accession to the World Trade Organisation (WTO), this group saved only about 5% of disposable income.
Suppose the People’s Republic spends 200 yuan, spreading it equally between the urban social safety net and rural healthcare. The IMF’s simulations show private spending would rise by 40 yuan in cities and towns, and by 35 yuan in villages.
Housing wealth may once have been an inducement to consume, but now high home prices are only making young people anxious about outsize down payments. President Xi Jinping’s rental-housing push hasn’t worked as intended, and anyway it can’t match up to possible gains from residency, or hukou, reforms.
Instead of papering over cracks in growth with short-term stimulus, the goal of fiscal policy should be to redistribute income away from top earners and surplus-hoarding state owned enterprises and towards low-income families. The next phase of consumerism will be less about the things people spend on and more about who among them will do the heavy lifting. Unlocking the spending power of service-industry workers in smaller cities may well be the sixth wave.
—Bloomberg

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services