AS CHINA’S economic recovery enters a critical stage, it is essential to address challenges including soaring youth unemployment, shaky consumer confidence and a patchy rebound across different consumption sectors. These issues have spurred a need for government measures to boost consumer spending.
We see a large-scale issuance of consumption vouchers as a feasible stimulus to spur domestic spending, a key growth engine.
Handing out cash subsidies or consumption vouchers to residents has become a common fiscal incentive for countries worldwide to bolster consumption since the Covid-19 pandemic.
On the one hand, such a measure can essentially lift households’ disposable income and purchasing power, which in turn stimulates spending. It can also drive a steady economic recovery through a “multiplier effect”, meaning such handouts will help support upstream and downstream industries, boost businesses’ production, fuel employment, raise residents’ disposable income, and eventually expand domestic demand.
On the other hand, subsidising low- and middle-income groups hit hard by the pandemic can prevent a widening income gap among residents. It can also serve as a targeted stimulus to the services sector, on which the pandemic took a heavy toll.
In China, the issuance of consumption vouchers has proven positive in boosting spending, yet the scale of such issuances has been small, restricting its overall impact.
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Considering their effectiveness, we suggest China expand the issuance of consumption vouchers this year to maximise their effect in spurring spending.
If consumption vouchers worth 300 billion yuan (S$58 billion) are disbursed nationwide this year and the multiplier effect is 3.5, they will lead to an increase in domestic consumption of as much as about 1 trillion yuan. Such spending, equivalent to 2.4 per cent of China’s total retail sales in 2022, can boost the country’s 2023 GDP growth by 0.62 percentage points.
Driver of recovery
Expanding consumption is the key to a sustained economic recovery.
First, weakening exports are already impacting the Chinese economy, with the sector’s prospects dimming as the recovery of overseas supply chains as well as interest-rate hikes in the United States and European countries weigh on China’s external demand. Meanwhile, the country’s property sector outlook remains uncertain despite signs of improvement in January and February.
Therefore, shoring up domestic demand – restoring and expanding consumption in particular – is key to energising economic growth.
Domestic demand has been sluggish overall since the pandemic, with the average contribution of final consumption expenditure to GDP growth plunging to 28 per cent during the three years of the pandemic, from some 63 per cent in the 2015-to-2019 period.
Lagging consumption has not only dragged on economic growth, but to some extent undermined the effect of macroeconomic policies, leading the government to prioritise “reviving and expanding consumption” in its work report this year.
Second, the recovery in domestic consumption has slowed since February, with uneven progress across sectors, which calls for stronger measures to boost consumer spending.
While travel-related spending has quickly bounced back, the consumption of durable goods – such as automobiles, communication devices and household appliances – remains relatively subdued. This can be attributed to a slow recovery in residents’ income and shaky consumer confidence.
It’s difficult for China to improve residents’ income, with youth unemployment remaining high and manufacturing profit slumping.
Third, from a policy standpoint, it is far more efficient to allocate fiscal funds to stabilise consumption than pour them into investment.
The multiplier effect of consumption is about three times that of investment, meaning funds financing consumption will generate a far more significant impact on the economy than those targeted at stimulating investment. Last year, Shanghai handed out four batches of consumption vouchers totalling 1 billion yuan, spurring 3.5 billion yuan in consumption.
Fourth, in the medium to long run, boosting consumption is an essential choice to address an ageing population at home and various challenges abroad.
Growth in the world’s largest economies tends to be heavily consumption-driven, and there is still plenty of room for the share of consumption to build up in the Chinese economy. From 2000 to 2021, the share of consumer spending in the US GDP edged up from 66 per cent to 68.2 per cent, while the indicator slumped from 47 per cent to 38.5 per cent in China.
In the future, the domestic market will play an increasingly crucial role in bolstering economic growth, with consumption taking a bigger share, while economic momentum fades globally.
At the same time, a rapidly greying population at home means a shrinking working-age population and slowing capital accumulation, which will take a toll on China’s potential growth rate.
Nevertheless, given its advantages such as a huge market and a large population, China still sees plenty of room in expanding consumption and stabilising economic growth through a slew of reforms aimed at boosting income growth and improving income distribution. CAIXIN GLOBAL
The writer is managing director and chief macroeconomist of Everbright Securities.
