SAWT BEIRUT INTERNATIONAL

| 15 July 2024, Monday |

China: Will more domestic consumption bolster the economy?

Optimism was initially strong regarding the revival of the Chinese economy following the cessation of its stringent zero-COVID approach. Regrettably, these expectations have been disappointed.

Exports have descended to their lowest point since the spring of 2020. The gross domestic product (GDP) stands considerably lower than recent predictions. The Purchasing Managers’ Index, a pivotal gauge of economic vitality, has undergone a decline over the course of four consecutive months. Furthermore, youth unemployment has surged to an all-time peak, surpassing the 20% mark.
But Beijing has a plan. Just last week, the central government announced measures to boost domestic consumption. Chinese consumers will receive subsidies to buy electric cars, and access to social housing will be expanded. The goal is to get more spending cash into Chinese pockets.

Observers are skeptical that such measures will work. “Too selective, too little. They only help with the symptoms,” criticized Rolf Langhammer, an economics professor at the Kiel Institute for the World Economy. “It’s like a straw fire. It burns quickly, but goes out very quickly, too.”
For this economist and China expert, the main problem is that people in China no longer have much trust in the country’s economy. “That’s why the Chinese government is currently unable to provide sustained support for the economy,” he told DW.

High youth unemployment and the fear that incomes will stagnate are two factors that have led to this loss of confidence.

At a press conference on the measures to promote consumption, Li Chunlin, vice chairman of China’s National Development and Reform Commission, admitted that many Chinese consumers “have very little confidence and are very concerned about the economy.” Now, more effective measures were necessary, he said.

“If you don’t know how the economy is going to develop, then you’re more cautious when it comes to consumption, because of the great uncertainty and also because savings often serve as a retirement pension,” explained Vera Eichenauer, an economic researcher at the Swiss Federal Institute of Technology in Zurich.

“The high number of unemployed young people has an effect on the willingness to spend, because young consumers have no money,” Eichenauer continued. That means parents often have to step in and provide more support, which in turn means they, too, will have less to spend. “China also risks deflation, which means that prices could do down. At first glance, that would be good for consumers. But they would consume less today because they expect an even lower price in the future.”
Eichenauer emphasizes that measures like discounts for electric vehicles and electronics don’t get to the heart of the matter. “They have to work on the pension system and unemployment to give consumers more hope and confidence in the future,” she said.

She suggests lifting some restrictions on digital companies, because companies like Alibaba offered many good jobs for young people a few years ago. With a bit of liberalization, new jobs would be created and that could have a positive effect.

A pivot to more domestic consumption
For decades, exports, real estate and infrastructure projects were the three most important pillars of the Chinese economy. For several years, Beijing has been trying to establish another pillar with strong domestic consumption.

They need this new support pillar more than ever, because the other three are beginning to falter. The real estate sector is in deep crisis, infrastructure investments are slow to bring returns and exports are sputtering.

Overall, the global economy is weak at the moment. There are fears of recession, but Western countries are using high interest rates to combat inflation, says Eichenauer. This also has an impact on China, since it hurts demand for its products.

“In addition, there is the global geopolitical or geo-economic situation. People are unsure how the tensions between China and the US, or with the West as a whole, will continue,” said Eichenauer. “There are a number of challenges coming all at once.”

Rolf Langhammer from the Kiel Institute for the World Economy is convinced that if China wants to become an economic superpower based on more domestic consumption, then that must become a significantly larger share of the economy.

“That’s only possible if the state spends big on social expenditures to give people confidence and courage to consume more again. That’s a long-term path, but I think it’s the only way,” said Langhammer.
Yet just when it needs it most, China is running out of money. Local governments, in particular, are heavily in debt. In view of the huge challenges and structural problems, Beijing’s measures are too small and only try to cure the symptoms, not the underlying problems, thinks Eichenauer.

While agreeing that Beijing needs to address youth unemployment and social security issues, she points out that any measures that could really help the economy will be expensive.

One possibility is to stimulate lending by lowering interest rates, but this could prove risky given the current debt problems. “Another possibility is deregulation or liberalization, where you dismantle rules, for example for digital companies. This will lead to new business opportunities and generate a new dynamic,” she concluded

    Source:
  • DW