eco TV

China: household consumption lacking momentum


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


François Doux

Now three questions about China, where growth is slowing.

Christine Peltier, hello.

Christine Peltier


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

China, still weakened by the Covid-19 shock 5/22/2020
Economic activity contracted sharply in February, the first month of the lockdown, before rebounding very gradually in March and April. The recovery is bound to be very slow after this brutal first-quarter shock [...]
China’s economy is slowly recovering 5/19/2020
In China, production activity is rebounding gradually. Domestic demand is showing signs of recovery. However, prospects in the very short term remain darkened by global demand weakness and revenue losses of both enterprises and households. Following the annual meeting of the National People’s Congress, which takes place from May 22, the authorities are expected to announce a new series of stimulus policy measures.
Is the worst over? 4/8/2020
China’s population and its economy were the first to be struck by the coronavirus epidemic. Activity contracted abruptly during the month of February before rebounding thereafter at a very gradual pace. Although the situation on the supply side is expected to return to normal in Q2, the demand shock will persist. Domestic investment and consumption will suffer from the effects of lost household and corporate revenues while world demand is falling. The authorities still have substantial resources to intervene to help restart the economy. Central government finances are not threatened. However, after the shock to GDP growth, the expected upsurge in domestic debt ratios will once again aggravate vulnerabilities in the financial sector.
China: economic contraction is expected in Q1 2020 3/18/2020
The most recent PMIs announced the shock earlier this month: industrial production fell strongly in January-February 2020, declining by 13.5% year-on-year. China also registered a very severe contraction in total exports (-18% y/y), fixed-asset investment (-24.5%) and volumes of retail sales (-23.7%). Such a collapse in economic activity is an unprecedented situation in China, which is expected to record a contraction in real GDP in Q1 2020. Activity has been recovering gradually in recent days, and a rebound in real GDP growth is expected in Q2 2020, notably supported by the authorities’ stimulus policy measures. However, the extent of the economic recovery is now likely to be constrained by the consequences of the sanitary and economic crisis currently spreading in Europe and the rest of the world.
China: the central bank is taking action to support corporates amid the Covid-19 outbreak 2/26/2020
A large number of economic sectors have been struggling with the impact of the Covid-19 epidemic on Chinese consumer demand, transport, tourist flows and industrial production chains. Over the past month, the People’s Bank of China (PBOC) has loosened monetary and credit conditions in order to support local corporates, help them cover their cash requirements et encourage a rapid recovery in activity. PBOC has injected a large amount of liquidity into the financial system, reduced interest rates – monetary rates, medium-term lending facility rate and benchmark lending rate – and announced special loans to firms directly affected by the virus outbreak. As a result, the weighted average lending rate, which has declined since Q2 2018 (from 5.94% to 5.44% at end-2019 in nominal terms), should continue to fall in H1 2020. Yet, the acceleration in domestic credit growth should prove to be very moderate.
The economic consequences of the coronavirus 2/7/2020
The outbreak of the coronavirus is a textbook example of an exogenous shock. It forces a rethink of the scenario for growth for the next months by looking at the demand and the supply side effects.
The year starts with a reprieve 1/24/2020
In 2019, economic growth slowed to 6.1%. Total exports contracted and domestic demand continued to weaken. The year 2020 is getting off to a better start as activity shows a few signs of recovering and a preliminary trade agreement was just signed with the United States. Yet economic growth prospects are still looking downbeat in 2020. The rebalancing of China’s growth sources is proving to be a long and hard process, and economic policy is increasingly complex to manage. Faced with this situation, Beijing might decide to give new impetus to the structural reform process, the only solution that will maintain the newfound optimism and boost economic prospects in the medium term.

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 2422 articles and 621 videos