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China’s thrifty consumers are key to its economic growth – can Beijing convince them to spend more?

If anyone is going to champion faster growth in China this year, it will be up to consumers to go all out, save less and spend more to add growing weight to the recovery. But Beijing must play its part too, keeping consumers sufficiently upbeat to meet this year’s 6-6.5 per cent official growth target. It should also help the government meet its pledge to shift the long-term focus onto a stronger domestic economy rather than external trade.

It is no accident that China is evolving into an advanced consumer-driven economy, with consumer spending accounting for nearly two-thirds of economic growth. Beijing wants sustainable economic expansion based on more stable domestic growth with less vulnerability to volatile mood swings in the global economy. The damage to growth prospects from the US-China trade war has been a painful reminder that Beijing should capitalise more on its domestic strengths.

China’s consumers are important bellwethers and they could still be losing traction. Consumer confidence remains cautious and may lead to households holding back on spending in the face of rising economic uncertainties, not good news for an economy historically accustomed to thrift. China’s gross domestic savings rate, at 47 per cent of gross domestic product, is among the highest in the world, according to World Bank figures. A strong savings rate is a mixed blessing when it drags on growth.

The challenge for Beijing is how to tap into this deep pool of domestic savings, harness the pent-up spending power and channel it into a stronger, long-lasting recovery. Annual inflation-adjusted retail spending growth picked up to 7.1 per cent in February from a cyclical low point of 5.6 per cent in October last year, but it is too soon to say whether this marks a turnaround in consumer optimism after eight years of slowdown. Consumers have a lot on their minds right now.

Worries about the global trade outlook, job prospects and housing market uncertainties all underline growing risks to economic confidence. In the short term, there are things that can be done to help. Beijing must be quick to cut a trade deal with Washington to ease the logjam on world trade. More importantly, monetary and fiscal policy settings must be kept extremely loose and Beijing should prioritise vital infrastructure investments to revitalise domestic recovery.

Longer-term structural developments will need to focus on harnessing new technologies and labour market efficiencies to compensate for China’s changing demographic fundamentals, especially in view of the country’s falling birth rate. This has dropped very sharply from a high point in the early 1960s to an all-time low by the end of 2018, raising the risk that slower population growth could have negative implications for future labour market bottlenecks.

The last thing Beijing needs is workforce constraints on future economic growth potential. To compensate, advancements in artificial intelligence, robotics and labour-saving technologies could provide a much-needed boost for China’s domestic regeneration, while helping to increase export competitiveness at the same time. It could spur the next leg of China’s capital-intensive, productivity-driven economic renaissance, taking income generation and wealth formation to much higher levels and offering consumers good news.

A thriving, consumer-based recovery absorbing a greater share of goods from abroad could also help mend fences in China’s strained trading relationships with the rest of the world. It would definitely help heal wounds with the US as more open access to China’s burgeoning consumer market has been a key objective of US President Donald Trump in trade negotiations.

Looking to the future, Beijing needs to be resourceful, crafting innovative economic and social policies to encourage a greater propensity for consumers to spend more and save less. The International Monetary Fund identified a number of key areas where China could do more to encourage greater personal consumption. Increased spending on health care, pensions, education and social security – coupled with a more progressive, family-friendly tax system – would be steps in the right direction to reduce income inequality while alleviating people’s need to save more for retirement and to pay for health care.

It may seem a challenge but consumers should be the dynamic leading edge of China’s recovery.
Source: New View Economics

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