Stoking consumption resolutely against all odds

A customer buys vegetables at a supermarket in Nanjing, capital of east China's Jiangsu Province, Aug 9, 2021. [Photo/Xinhua]

Amid several stiff challenges, fresh measures to increase spending, sustain recovery

Despite multiple challenges posing questions about sustained economic recovery in China this year and beyond, economists remain sanguine and aver it would probably be a big mistake to forget the country was the only major economy in the world that posted positive growth last year in spite of the COVID-19 pandemic.

What's giving them confidence is their conviction that China's consumption recovery story is largely intact.

First, about the challenges, which seem to abound: loss of steam on the exports front due to reopening of developed economies; resurgence of COVID-19 cases due to the Delta variant; recent heavy rains that wreaked socioeconomic havoc in certain key parts of the country; structural problems like a slowdown in population growth; high housing prices; low-income groups facing difficulty due to struggling small businesses whose hiring is at lower levels; surge in raw material prices that hurt the manufacturing sector; and offline consumption like travel that cannot simply be moved online.

"The heavy rains and the Delta variant are limiting offline consumption. Not every type of offline consumption can be replaced online. For example, domestic travel can't be replaced," said Iris Pang, chief China economist at Dutch bank ING.

Agreed Cheng Shi, chief economist at ICBC International. The global supply chain has been recovering on the back of better control of the COVID-19 pandemic overseas. This factor could weigh on China's surging exports. Also, the nation's strong investment in property development will soften due to tougher government policies to stabilize housing prices, he said.

Yet, most economists and business leaders argue that consumption, which contributed more than half of China's GDP in 2020 (101.6 trillion yuan or $14.7 trillion), is estimated to account for as much as about 60 percent of full-year GDP growth (China's GDP is projected by the International Monetary Fund to grow by 8.1 percent this year).

China's consumption recovery will sustain, no matter what－that's the consensus among experts who are pleased that positives abound too: the overall employment situation is stable; the mass vaccination has helped anchor consumer confidence; surging industrial profits bode well for household income; policies supportive of consumption may come to fruition; and new forms of online consumption are becoming popular.

What's more, unlocking domestic demand is central to the "dual-circulation" development pattern, which takes domestic circulation as the mainstay while letting domestic and foreign markets support each other.

Hu Zuquan, a macroeconomic analyst with the State Information Center (SIC), a Beijing-based national policy advisory body, said: "China is a super large market with a population of 1.4 billion, a middle-income group of more than 400 million, and per capita GDP exceeding $10,000. It still has huge, multi-tiered potential for consumption upgrade."

With positives and challenges seemingly hanging on either side of a balance, policymakers, economists and business leaders have stressed the need for stepping up policy efforts to boost domestic consumption. Both short-term policy easing and longer-term reform measures would be in order, they said.

It is critical to ensure the recovery in consumption keeps a good shape and powers China's economy, Cheng of ICBC International said.

At a meeting on July 30 in Beijing, the Political Bureau of the Communist Party of China Central Committee underlined efforts to tap domestic market potential. The top leadership stressed accelerating the development of new energy vehicles, and the integration of rural e-commerce and logistics delivery systems.

"The growth engine of the Chinese economy is transitioning from external demand to domestic demand. Risks and challenges cannot be ignored in this process," said Cheng.

"Consumption is recovering, albeit at a lackluster pace. But consumption remains a key engine of China's economic growth."

So far this year, China registered a recovery in consumption, but it is yet to return to pre-COVID levels.

For instance, in the January-July period, the country's retail sales grew by 20.7 percent year-on-year and by 4.3 percent on a two-year average basis, the National Bureau of Statistics said.

"There is still room for further recovery in consumption," said Wu Chaoming, chief economist at Chasing Securities. Consumer confidence is brightening as the vaccination rate rises, and household incomes will further recover as corporate earnings improve, he said.

The profits of China's industrial enterprises above the designated size, which serve as a leading barometer of personal disposable income, have rebounded since the second quarter of last year. In the first half of this year, they rose 20.6 percent on a two-year average basis, the NBS said.

Hu of the SIC said new forms of online consumption will inject a strong momentum into the ongoing recovery in consumer spending.

As COVID-19 disrupts the order of offline spending, online consumption scenarios have been emerging at a fast clip. For instance, Chinese short-video platform Douyin has launched a series of online concerts this month that charged the audience.

As a result of such innovations, the nation's online retail sales surged by 15 percent on a two-year average basis in the first half, outpacing the 4.4 percent for total retail sales, official data showed.

The room for future consumption recovery, however, may remain constrained by the difficulty faced by low-income groups. For instance, rural migrant workers' incomes have not received a boost for a while as many smaller businesses are under the pressure of inflated costs and hence reluctant to hire new employees, Wu of Chasing Securities said.

Employment in the manufacturing sector has contracted slightly for four months in a row as of July, while the purchasing prices of raw materials used by the sector have risen sharply or substantially each month this year, according to an NBS survey.

Other negative factors may also sustain, Wu said. These include the drain on disposable income by spending on housing and the asymmetry in economic development in northern and southern areas of the country.

"We should face up to the truth that the recovery in domestic demand has remained unbalanced and needs to be further consolidated," said Hu of the SIC.

He also underscored the need to strengthen policy supports to promote the employment of college graduates and rural migrant workers, alleviate the impact of surging raw material prices on smaller enterprises, and put the tax and fee cuts in place.

Pang of ING said the COVID-19 resurgence and heavy rains in some parts of China may also put some pressure on consumption in the third quarter, though the disruption to most international travels will likely boost domestic spending at duty-free shops.

According to her, policymakers may roll out pro-growth policies to buffer such risks in the remainder of the year, including increasing fiscal spending on people and firms affected by heavy rains and implementing another cut in the reserve requirement ratio as a follow-up to the one in July.

Su Jian, a professor at the School of Economics at Peking University, said growth in China's consumption is facing long-term pressure brought by a slowdown in population expansion, which may even have come to a standstill, softening both per capita income growth and people's declining propensity to consume.

"This is why, China should unveil substantial, effective measures to boost consumption," Su said.

Economic institutions related to the property market, education, medical care and social security should be further improved to shore up people's propensity to consume, in tandem with multiple measures to stabilize the country's birth rate, he said.

Some short-term supportive measures and long-term structural reforms are already in place, and the recent COVID-19 resurgence is expected to be contained by the end of September, so growth in retail sales is likely to rebound in the fourth quarter and stabilize at about 7 percent in the long run, experts said.

"It's very likely that the domestic COVID-19 resurgence will get controlled by the start of October," analysts with Shanghai-listed Guotai Junan Securities said in a note. "The fourth quarter, therefore, should be this year's high season for retail sales, which is expected to see a sped-up recovery in consumption."

Stephen Dyer, managing director of global consulting firm AlixPartners, said he expects China's auto sales, a key component of consumption, to continue to grow and surpass the sales level of 2019 by a small margin for the full year.

Over the next 15 years, growth in China's retail sales may stabilize at around 7 percent in nominal terms and 5 percent in real terms, roughly at the same pace as economic growth, said Wu of Chasing Securities.

Hu of the SIC said China's supportive policies for automobile purchases, rural consumption and the night economy will also help unlock the huge potential of China's consumer market.