How long will the rebound in Chinese consumption last?
A commentary by Mali Chivakul, Emerging Markets Economist by J. Safra Sarasin on the situation of the economy in China, the dynamics of consumption and the real estate market with the 14th Congress of the Communist Party
Chinese households have accumulated a large amount of savings during the pandemic years, as lockdowns and other restrictions have prevented them from enjoying touchable goods and income uncertainty has prompted households to increase precautionary savings . The household saving rate, calculated on the basis of household income and spending surveys, rose from 30% in 2019 to an average of 33% in the three years of the pandemic. Assuming that the 3% difference represents excess savings, that would be a total of 3,100 yuan per capita or 4.4 trillion yuan for the whole country (3.6% of GDP).
Will Chinese consumers spend much more this year given the glut of savings? Household income in general is the main determinant of household consumption. As the service sector outlook improves, employers will likely start hiring more. The first evidence (Internet, semiconductor and airline sectors) seems to be encouraging as regards the labor market and employment prospects.
In developed markets, household wealth is also an important factor in consumption. In China, the majority of household wealth is represented by real estate. It is unclear how house prices drive Chinese household consumption: on the one hand, rising prices imply that households who are not yet homeowners will have to save more in order to afford a house. On the other hand, with rising prices, existing homeowners could spend more thanks to the increase in their assets.
The effects usually depend on the type of homeowner. In the last housing crisis of 2014, household consumption growth remained robust at 5.8%, even as house prices fell by 5%. From an empirical point of view, based on micro-level data, recent studies show both effects. Some have seen an increase in consumption when home prices have soared. Another study suggests that the wealth effect has prevailed increasingly over time, but if the market is dominated by speculative buyers, higher prices could mean greater savings.
However, the fall in house prices could affect household sentiment and therefore overall economic conditions, to the point of increasing precautionary savings and reducing consumption. An important mitigating factor is government policies. It's a good sign that central-level policymakers are emphasizing the importance of consumption growth in 2023. However, it will be important to keep an eye on the policy details, which will be unveiled in early March. Recent news of cuts in local government healthcare services (and other spending cuts) point to increased central government support, which will be key to sustaining durable consumption as local government finances remain very tight . Households will not overspend their savings if there is still significant uncertainty about their income, including government transfers.
Finally, the latest household income and spending survey also confirms our view that the rebound in consumption this year will be predominantly oriented towards leisure activities, such as travel and entertainment. The share of these activities decreased significantly between 2019 and 2022. The share of food expenditure, on the other hand, increased. We expect the opposite to happen this year.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/quanto-durera-il-rimbalzo-dei-consumi-cinesi/ on Sat, 04 Mar 2023 06:15:56 +0000.