Spending power

Jobs and incomes are key to boosting consumption

China is witnessing a prolonged slowdown in consumer spending. Growth in per capita consumption expenditure had been slowing for years, even before the outbreak of the COVID-19 pandemic.

In 2020, because of the COVID-19 pandemic, the per capita consumption expenditure shrank by 4 percent in real terms after deducting price factors, the first decline since the launch of reform and opening-up in China in 1978. Despite a real increase of 12.6 percent in per capita consumption expenditure in 2021, the two-year average real growth was only 4 percent, notably lower than the around 5-percent real growth in per capita GDP over the same period, and much lower than the pre-pandemic consumption growth.

In the first half of this year, China's retail sales of consumption goods have witnessed negative growth for several months, and the sluggish consumption is becoming an increasingly severe problem. In general, a sustained slowdown in household consumption growth is a result of the following five elements.

As China's maturing economy transforms from high-speed to medium-speed growth, China is experiencing a marked slowdown in per capita income growth. Before the outbreak of the COVID-19 pandemic, the growth in per capita consumption expenditure had fallen from 12.4 percent in 2007 to 5.6 percent in 2019, down 6.8 percentage points, of which at least 4.6 percentage points were caused by slower income growth according to quantitative estimation.

The imbalance in income distribution has undercut income growth's role in promoting consumption. Lower-income households have a higher marginal propensity to consume, as they have greater unmet demands for life necessities. Put differently, the same amount of incremental income results in different spending growth among different groups of income levels. However, over the past few years, the growth in income for China's low- and medium-income people has been lagging behind that of high-income people, dragging down the overall growth of consumer spending.

Rigid areas of household consumption expenditure have accounted for a large proportion in total expenditure, holding back the growth of overall household consumption. Residential housing expenses including rent and mortgage loans, and expenditures on utilities, children's education, medical services as well as elderly care services are usually rigid items in household consumption expenditure. Over the past few years, the proportion of this part has been constantly rising. Against the backdrop of an expected slowdown in income growth and accelerated population aging, Chinese people have tried to ensure they have enough to spend on essential items by reducing their non-essential spending.

There's still pent-up demand in certain areas. Some cities have adopted administrative measures for a certain period－such as restrictions on housing prices, purchases, sales and loans－to directly intervene in the real estate market, not only damaging the price signals as well as distorting market behaviors and social behaviors (such as marriages), but also suppressing people's reasonable demand for housing and relevant goods. Another area with pent-up demand is the automobile sector. Some cities have long imposed purchase restrictions, holding back the demand for cars and associated consumption. Moreover, there is still a lack of effective supply in certain areas and consumers' demand for high-quality, diversified goods and services could not be satisfied.

While the pandemic has had multiple impacts on consumption. The most directly affected area is the service sector. Consumption of services accounted for over 45 percent of total household consumption in 2019. Since the outbreak of the COVID-19, service consumption has been hit hard, resulting in a decline in income for relevant companies and employees, dragging down overall consumption. In addition, resurgence of the COVID-19 cases have intensified people's concerns over sluggish income growth and rising expenditures, dampening their willingness to spend.

China is growing to be a high-income economy in the coming decades, and there is still great potential for consumption growth.

The key to fully releasing the consumption potential lies in employment creation and income growth. In the short run, the key is to maintain stable performance of market entities and job opportunities, especially to guarantee the jobs and incomes of the low- and medium-income groups, and to promote their consumption. In the long run, China should uphold and strengthen the fundamental role of the market mechanism in resource allocation, continuously invigorate market entities with reform measures of all sorts, create more job opportunities, and ensure the sustained growth of incomes. From a longer-term perspective, China should improve its income distribution, including creating more education opportunities for the low- and medium-income families, providing more training to the low-income or low-skilled groups, and expanding the middle-income group.

China should also implement systematic reforms to resolve structural problems that hold back consumption growth, by removing people's worries about the future and boosting their willingness to spend. Housing market reforms are expected to continue, including but not limited to increasing the supply of houses in large cities, lowering the cost of mortgages, etc. Medical and healthcare system reforms should be deepened. Tiered diagnosis and treatment should be promoted, the public healthcare services capacity should be strengthened, and people's medical expenses should be lowered. Furthermore, reform and innovation in the education system should be accelerated to increase the supply of education resources and improve its quality.

Supervision and regulation of certain sectors should abandon the various administrative measures, including price control, quota control, as well as various constraints and remove restrictions in key consumption sectors, with a fast transition to market-based measures. Pandemic control measures should be optimized to speed up resumption of operation in the service sector, so as to foster recovery in consumption of goods and services and restore these sectors' role in stimulating and absorbing employment.

Local governments should be urged to cancel restrictions on houses and cars, and restore relevant consumption, like various household electrical appliances. Meanwhile, local governments could improve the traffic infrastructure relying on new technologies, such as smart road systems, sky parking and electric vehicle charging piles to satiate people's demand for car consumption.

Last but not least, China should increase effective supply and improve the supply quality to meet people's demand for consumption upgrading. Entry barriers to the market should be cleared or at least lowered with reforms, to allow more companies to enter the medical services, healthcare and sports sectors. In the meantime, China should open its door wider to the world to import more goods to meet consumer demand. Local protectionism should be broken down to eliminate market segmentation and accelerate the pace of building a national unified market.

Yang Guangpu is an associate research fellow with the Development Research Center of the State Council. Shen Shanshan is an associate research fellow with Northeast Normal University. The authors contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn