- China’s past high economic growth is supported by large-scale debt-supported investments that cannot be sustained indefinitely. China’s economy planners, fully aware of this weakness, have consistently called for a decisive shift towards a consumption-driven economic model, similar to what major developed economies like the US, Japan and Germany have achieved.
- However, the economic data shows that implementing this rebalancing process is full of challenges. The share of private consumption to GDP in China merely rose from 35% in 2010 to 38% in 2015. Afterward, the ratio actually stalled at around 38% during the next few years.
- The long-term nature of changes in consumption behavior contributes to this lagging shift of the consumption-to-GDP ratio. However, the current volatility of China’s policy environment also creates high uncertainties, causing consumers to be extremely cautious about increasing their expenditures.
- For instance, under the current “zero-covid” policy, many citizens feel the pressure of securing jobs and become less optimistic about their future incomes, therefore preventing themselves from consuming “non-necessity” goods or services.
- Furthermore, specific economic policy choices during this distressed period also influence consumer behavior: Contrary to the governments in the US or Europe, who support citizens with direct cash subsidies, China’s policies are focusing on relieving enterprises from economic pressures (taxes, rents, etc.). No systemic support towards mid-to-low income groups has been issued throughout the pandemic. This helps businesses recover, but also leads to divergence in consumption recovery. Luxury goods experienced explosive growth in 2021 while mass brand goods recorded only mild growth.
- To achieve the planned economic rebalancing, China needs to maintain a stable policy environment to induce trust in consumers and take more steps to support lower-income groups.
Sinolytics is a European consulting and analysis company specializing in China. It advises European companies on their strategic orientation and concrete business activities in the People’s Republic.