China: household consumption lacking momentum

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.