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

Soft patch 7/17/2022
Chinese economic activity contracted by 2.6% quarter-on-quarter in Q2 2022, with almost zero growth (0.4%) year-on-year. This poor performance was primarily the result of mobility restrictions introduced in several of the country’s provinces in response to the latest wave of the Covid19 pandemic, with the strictest restrictions in force from March to May in major economic centres such as Shanghai. The economic shock in Q2 2022 was severe and unexpected, but was nevertheless less violent than that in Q1 2020, when the lockdown measures introduced at the beginning of the crisis resulted in a collapse in activity of 10.3% q/q and 6.9% y/y.
Weakening economic growth outlook 6/29/2022
China’s economic activity contracted in April and May 2022 because of stringent mobility restrictions introduced in major industrial regions such as Shanghai. Since late May, restrictions have eased gradually and activity has started to rebound. As downside risks remain high, the authorities continue to ease their fiscal and monetary policies. While credit demand stays weak in spite of the decline in interest rates, the current global environment and the risk of capital outflows may constrain the central bank’s room for maneuver.
Still high downside risks to short-term economic growth 6/19/2022
The significant contraction of the blue area relative to the dotted area illustrates the magnitude of the shock faced by the Chinese economy since March 2022. The resurgence of the Covid epidemic has led to the introduction of mobility restrictions in many provinces, with the most stringent lockdowns affecting major industrial and port regions, notably Shanghai. Restrictions have depressed household demand and dampened activity in factories, disturbed the transportation and export of goods, and led to supply-chain disruptions in China and abroad.
Economic contraction 5/22/2022
China’s economic growth started to slow down in March, then activity contracted in April (industrial production: -2.9% year-on-year, services production: -6.1% y/y). This rapid deterioration has principally resulted from mobility restrictions implemented in various provinces of the country in response to the epidemic wave. Most importantly, stringent lockdowns have been imposed in some major industrial and port regions (notably Shanghai), which has dampened activity in manufacturing factories, disturbed transport of goods and leading to supply chain disruptions in many sectors. Overall, the health situation and the level of mobility restrictions in China are improving in May. Local economic activity may therefore be able to recover at least slightly.
China: new economic slowdown, new rise in credit risks 5/20/2022
In China, economic activity contracted in April and the short-term economic outlook remains uncertain. In this complicated environment, how is credit risk evolving?
Abrupt economic growth slowdown in China 5/19/2022
China’s economic growth strengthened slightly in the first two months of 2022, but the rebound was cut short in March.
Chinese exports: a major growth slowdown is expected 5/3/2022
After an extremely solid performance in 2020 and 2021, export growth will slow steeply in 2022. Export growth rates have already been normalising in recent months, and the slowdown is expected to deepen in Q2 2022. This is the consequence of supply-side constraints due to disruptions in factories, supply-chain difficulties in the manufacturing sector and problems with goods transport following lockdowns in several main industrial and port regions (notably Shanghai). Exports to other Asian countries (47% of China’s total exports) were the first to be hit by China’s logistics problems and slowed markedly in March. On the demand side, the outlook has been worsening since the beginning of the war in Ukraine. In its April World Economic Outlook, the IMF further downgraded its forecast for world economic growth in 2022, to 3.6% (down from 6.1% in 2021) and for world trade growth to 5% (from 10.1% in 2021). The slowdown in China’s export growth and the expected deterioration in its trade and current account surpluses (all the more so as its import bill is hit by rising commodity prices) – coupled with the effects of the growing divergence between monetary policies of People’s Bank of China and the US Fed – contributed to the sudden depreciation (of around 4%) of the yuan against the US dollar in April.
In lockdown 4/24/2022
China’s economic growth reached 4.8% year-on-year (y/y) in Q1 2022. It improved slightly over the first two months of the year, both in industry and in services, but this recovery was cut short in March. Economic conditions have worsened rapidly, as our barometer shows (narrowing of the blue area relative to the dotted area). This deterioration has resulted primarily from the resurgence of Covid-19 and mobility restrictions imposed in a number of regions in the country. In addition, short-term growth prospects are also looking bleaker due to deterioration in the international climate triggered by the war in Ukraine.

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 1811 articles and 362 videos