18 September 2024
China has often focused on boosting production to stimulate the economy. However, policymakers are now shifting their approach more towards supporting consumption, especially as spending has slowed, which they see as essential to meeting growth targets and facilitating the country’s economic transition. While there is a focus on goods, like the RMB150bn allocated to consumer goods’ trade-ins, July’s Politburo Meeting also highlighted services consumption, as did the State Council in August.
Services consumption hasn’t yet reached half of all consumer spending in China, even though it is often the lion’s share in advanced economies (Chart 2), showing there is still plenty of room for growth. In the post-pandemic period, consumers have shown a clear preference for spending on experiences over buying physical items, mirroring the shift from goods to services seen in other economies. Given China’s current development stage as a high middle-income country, consumers naturally have growing demand for services as well.
Note: Consumption expenditure is used, instead of retail sales, because retail sales only include one type of service consumption – catering. 2024 is H1 data.
Source: Wind, HSBC
Note: 2024 is H1 data. Source: Wind, HSBC
July’s Politburo meeting reinforced the view that consumption-led growth will help drive the recovery. The Politburo specifically called for growth in domestic demand, driven by income growth, increasing consumption by low- and middle-income groups, and increasing consumption of services in areas like elderly care, childcare, and household-keeping services. This means that more near-term support to push forward consumption is likely, possibly in the form of direct subsidies to individuals tied to certain types of services.
Stabilising the housing market is critical as it is the primary drag on household asset value and consumer confidence. The good news is the recent shift in the policy stance by the central government: during the Third Plenum’s press conference, a senior official acknowledged the housing market’s systemic importance to the economy, justifying China’s direct bailout, such as using the central government’s balance sheet to acquire distressed housing units.
The Third Plenum included reforms targeting productivity growth and enhancing social welfare, which are both capable of boosting domestic consumption. Providing public services based on permanent residence, as well as land reforms that allow migrant workers to profit from their rural properties, could unleash their full spending power. Meanwhile, reforms to reduce internal barriers (e.g. a unified national market) and accelerating opening-up could spur innovation and provide jobs for new graduates.
Source: Refinitiv Eikon
* Past performance is not an indication of future returns
Source: Refinitiv Eikon. As of 15 Aug 2024 market close
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