China Economic Update: September 2018

China’s consumers aren’t ready to drive the economy’s growth.

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  • With the external pressures on China’s economy growing, authorities appear to be fighting the trade war on multiple fronts, including increasing tax rebates for exporters, loosening monetary policy and easing policy constraints on infrastructure developments. The latter is perhaps the biggest surprise, given that a crackdown on unauthorised projects by Beijing – in part an effort to address unsustainable debt at the local government level – was a component of the recent deleveraging program. To return to such an old fashioned form of stimulus points to a lack of progress in China’s development – the still limited role of the consumer.
  • Recent trends in retail sales point to a problem for Chinese authorities in attempting to combat US trade measures. China doesn’t consume enough – household consumption was only around 39% of GDP in 2017 – and isn’t growing fast enough (particularly recently). Real retail sales increased by just 6.6% yoy in August – below the growth rate of the broader economy in Q2 2018 – suggesting that consumers aren’t yet ready for a larger role in driving growth.
  • There are a range of factors that explain why China’s consumption has remained comparatively low. These include: inequality, weak wages growth, rising household debt, demographic changes and limited social security.
  • According to the IMF, the key measures to increasing domestic consumption are a strengthening of the social security system, reducing income inequality and increasing household incomes. For the former, this would include large transfers to poorer households as well as boosting expenditure in areas such as education, healthcare and pensions (where spending lags advanced economy rates). Lowering inequality is challenging, but improving the tax system – particularly to make it more progressive – is one part, as well as further reforms to the household registration (Hukou) system – to reduce the disadvantage of migrant workers.

For further details, please see the attached document: