The Central Economic Work Conference held last year put expanding domestic demand at the top of the economic agenda for 2023. The government report prioritized “the recovery and expansion of consumption.”
“The incomes of urban and rural residents should be boosted through multiple channels,” it said. “We should stabilize spending on big-ticket items such as automobiles and promote the recovery of consumer services in sectors such as catering, culture, tourism and sports.”
China’s trade in both exports and imports has sharply declined recently. Going forward, it is vital to unleash the potential of consumption to underpin steady growth.
According to the National Bureau of Statistics, from January to February this year total retail sales of consumer goods grew by 3.5 percent year-on-year to 7.71 trillion yuan, compared with a decline of 1.8 percent in December last year, indicating that consumption has rebounded significantly. However, 3.5 percent still falls short of the 5 percent economic growth target. In the first two months of this year, catering revenue topped 842.9 billion yuan, up 9.2 percent, representing the brightest spot in total retail sales. Also in good shape were sales of food and oil (up 9.0 percent), garments, shoes, hats and textiles (up 5.4 percent) and goods purchased online (up 6.2 percent). These are all related to people’s daily consumption.
Now that the pandemic is over, by and large, the normal order of life has returned. The spring season is in full bloom, and consumers are in the mood to spend and have fun, which is bound to drive a rebound in daily consumption. However, there are two major shortcomings: One is real estate consumption; the other is auto consumption.
For the real estate market, commercial housing sales from January to February totaled 151 million square meters, down 3.6 percent year-on-year. Sales revenues totaled 1.54 trillion yuan, down 0.1 percent. At the end of February, commercial housing for sale totaled 655 million square meters, up 14.9 percent year-on-year. So the real estate market is recovering slowly, with supply far outstripping demand.
For the January-February period, 2.13 trillion yuan in capital was deployed by real estate development enterprises, down 15.2 percent year-on-year. Retail mortgage loans totaled 349.5 billion yuan, down 15.3 percent. These figures show that the real estate market has not fundamentally improved.
As for the auto market, data from the China Association of Automobile Manufacturers shows that from January to February this year, auto production stood at 3.626 million units, while sales stood at 3.625 million units, down year-on-year, respectively, by 14.5 percent and 15.2 percent. How it evolves going forward remains to be seen.
As of the end of 2022, China had 319 million vehicles and 464 million drivers, meaning there is large potential for growth in the context of a population of 1.4 billion. But potential does not equate to effective demand. At present, consumers continue to feel the pinch, and supporting services such as auto finance, insurance, maintenance, appliances, leasing and used auto transactions are not sufficiently developed to support the burgeoning auto market. Meanwhile, cars are overpriced in China compared with developed countries, indicating that import duties and market transaction costs are suppressing potential.
Updated data show that housing accounts for about 30 percent of residential consumption; cars for about 10 percent; and food, tobacco and alcohol for about 30 percent. The rest accounts for about 30 percent — health, culture, tourism, education, sports, entertainment and information. Generally speaking, in the basic consumption of clothing, food, housing and transportation, clothing spending is most sensitive to income changes. As the saying goes, food is what matters most for people.
Obviously, buying food is not discretionary. It is therefore oblivious to economic cycles. In the same vein, food has limited headroom for growth as a source of spending. By contrast, buying a house requires a great deal of caution, as it a major expense. For tourism, although travel has been an essential part of the modern lifestyle, it has been affected by the pandemic in previous years. Its trajectory will depend on household income growth. But because housing and car consumption combined account for 40 percent of total consumption, it is unrealistic to expect rapid growth in overall consumption with negative growth in these two categories.
In my opinion, to restore and expand consumption, we need to roll out sound policy combinations and be solution-oriented to remove the obstacles that hinder consumption growth and make a breakthrough, especially in real estate and auto consumption:
• First, we should boost the confidence of private entrepreneurs and foster a fair and competitive market environment.
• Second, step up tax and financial policy support for small, medium and micro enterprises.
• Third, energize real estate market transactions.
• Fourth, encourage purchases of new energy vehicles.
• Fifth, stabilize the stock market. Improve the governance and information disclosure of listed companies, protect the interests of investors and increase property income for the public.
• Sixth, expand government investment and drive private investment, which in turn will increase employment and boost consumption.
• Seventh, improve the social security system to eliminate the worries of farmers and low-income groups.
• Eighth, improve consumer market laws and policies to protect the rights and interests of consumers.
• Ninth, funnel capital into sectors such as health, retirement, tourism, culture, sports, education, healthcare and entertainment to cultivate new supply and foster new consumer demand.