eco TV

China: household consumption lacking momentum

11/12/2019

While the export sector has been hit by US protectionist measures, private consumption growth has also slowed. Economic policy easing has remained prudent, but household spending should soon begin to strengthen thanks to recent tax measures.

TRANSCRIPT // China: household consumption lacking momentum : November 2019

3 QUESTIONS

François Doux

Now three questions about China, where growth is slowing.

Christine Peltier, hello.

Christine Peltier

Hello.

François Doux

China saw growth of 6.6% in 2018. In the third quarter of 2019 this dropped to just 6% year-on-year. First question, what is holding back Chinese growth?

Christine Peltier

First, the export sector has been hard hit by the increase in US tariffs and the slowdown in global demand. Over the first nine months of 2019, total exports were slightly lower than in the same period of 2018. In particular, China’s exports to the US fell by 11%. So China has to look for other sources of growth. The problem is that growth in investment and growth in private consumption have also been slowing down. The weakening of consumer demand has been particularly visible in the automotive sector, but the slowdown has also affected retail sales, sales of durable goods and online sales of goods and services.

François Doux

Second question: what are the reasons for this slowdown in growth in private consumption in China?

Christine Peltier

A series of factors explain the slowdown in private consumption growth. First, consumer price inflation has accelerated since the beginning of the year, driven by rising food prices, and particularly higher pork prices.

Then, the difficulties of the manufacturing sector have had negative effects on Chinese confidence and the labour market. The slowdown in real estate market transaction volumes has also probably affected Chinese consumers’ purchases of durable goods.

Another factor has been the slower pace of growth in consumer credit, following the authorities’ tightening of the rules on such lending. In particular, the authorities have tightened rules governing peer-to-peer lending platforms. Moreover, the burden of servicing household debt has probably started to weigh on spending, as household debt has increased sharply in recent years, reaching 56% of GDP.

François Doux

Are there also structural factors perhaps?

Christine Peltier

Yes, there are other persistent factors in China. First, real growth in the average per capita disposable income continues to slow. Secondly, China has considerable levels of income inequality, which hits private consumption. Lastly, Chinese households still save 36% of disposable income, which is a very high rate.

François Doux

Third and last question. What is the government doing to try to jump-start domestic demand?

Christine Peltier

As far as monetary and credit policy is concerned, the relaxation since the spring of 2018 has been prudent. Growth in corporate credit has picked up only slightly, whilst growth in consumer credit has slowed.

The authorities remain very cautious, and are tightly constrained by the debt excess of the Chinese economy and high levels of credit risk. The Chinese authorities have sought both to support economic growth, or at the very least limit its slowdown, and to pursue the process of cleaning up the financial sector, reducing debt of the most vulnerable companies and promoting a healthier expansion of the real estate market.

In terms of fiscal policy, there is a bit more room to manoeuvre. Investment in public infrastructure projects is starting to pick up, and a series of tax incentives has been introduced since last year. These tax breaks are aimed at helping corporates and stimulating private consumption. Their positive effects should start to feed through before the end of this year.

View more videos Eco TV

On the Same Theme

The real estate crisis spills over to the economy  11/22/2021
Our monthly Pulse highlights the cyclical deterioration of the Chinese economy in August-October 2021 compared to the previous 3-month period. While the situation in the industrial sector improved in October after a sharp slowdown in September, the correction in the real estate sector has continued. Industrial production growth picked up slightly in October (+3.5% y/y in real terms, compared to 3.1% in September and 5.3% in August). In fact, the measures introduced by the authorities rapidly eased energy constraints last month. 
China's economic engine is stopped 11/12/2021
In China, the property and construction sectors have long been key engines of economic growth. However, their activity contracted in Q3 2021. This downward correction is expected to continue, and its consequences for the rest of the economy are likely to be substantial.
China: Poor economic growth figures in Q3 2021  10/25/2021
Chinese real GDP growth slowed to 4.9% year-on-year (y/y) in Q3 2021 from 7.9% in Q2 2021.  In the services sector, growth slowed sharply in August (+4.8% y/y), due notably to the reintroduction of lockdown measures to counter a new surge in Covid-19 cases. Although services growth rebounded in September (+5.2%), it is still sluggish. Tighter regulations in a number of segments, including online services, tutoring and video gaming, have constrained activity. The services sector has also been hit by the downturn in the real estate market due to a severe tightening of prudential regulations and credit conditions in the sector. In Q3 2021, house sales contracted while property developers have encountered increasing financing and cash-flow problems. Projects under construction also declined and growth in property investment (which accounts for nearly a quarter of total domestic investment) slowed. The sharp correction in the real-estate market is expected to continue in Q4 2021. Growth in public infrastructure investment has yet to pick up the slack, although it should turn around in the very short term thanks to a new easing of fiscal policy. 
Painful adjustments 10/6/2021
The Chinese economy is in the midst of a period of major adjustments. They arose after Beijing tightened regulations in a variety of sectors, from housing to certain new technologies and activities linked to the societal challenges facing the country. The adjustments can also be attributed to the debt excess problem of some state-owned and private enterprises, and reflect the authorities’ determination to tighten their access to credit and to clean up practices in the financial sector. As a result, an increasing number of corporates is defaulting, and the troubles of the property developer Evergrande are symptomatic of the changes under way. For the authorities, the challenge is to maintain control over these events and to contain their negative impact on confidence in the financial system, on credit conditions for other economic agents and on economic growth.
China's public finances, a tangled web 9/28/2021
China’s public finances have been deteriorating for several years now, and the trend accelerated in 2020 with the Covid-19 crisis. Reforms introduced since 2014 have made the public sector’s accounts more transparent and improved the management of local governments’ budgets and debt. However, those changes have not stopped fiscal imbalances building up. In addition, large quasi- and extra-budgetary operations exist alongside the official budget, and there are many, sometimes opaque, links between the various public-sector entities. This means that analysing the public finances is often a complicated exercise.
Another hard blow to private consumption 9/20/2021
China’s economic growth slowed sharply over the summer. Lockdown measures reintroduced in response to the resurgence of the Covid-19 pandemic and the threat of the new Delta variant dealt another blow to private consumption. Growth in retail sales volumes dropped to 6.4% year-on-year in July and then to 0.9% in August, from an average of 11.9% in Q2 2021.
Difficult economic rebalancing 7/19/2021
Economic growth reached 7.9% year-on-year (y/y) in Q2 2021 vs. 18.3% in Q1 2021. This apparent slowdown is the result of growth rates gradually returning to normal in all sectors and all demand components; it was largely expected as base effects have become less favourable since last spring. This trend explains the contraction of the blue area compared to the dotted area in our Monthly Economic Pulse.

ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
This website presents their analyses.
The website contains 1614 articles and 292 videos