Policies targeting spending excesses are hammering listed companies from e-commerce giant Alibaba (9988.HK) to liquor specialist Kweichow Moutai (600519.SS). Elsewhere officials are moving to buttress trade surpluses and state industrial giants. Companies who had bet that Chinese shoppers would evolve into free-spending Americans will be worried; trade partners should be alarmed.
China may be a major contributor to global GDP growth, but that is largely a statistical by-product of weighted averages. The country’s gross savings rate, at 44% of national income in 2019, is one of the highest in the world; household consumption’s share of national output is nearly twenty percentage points below the global average, per World Bank data. For decades its state-driven investment model captured earnings from Chinese workers and lent them to strategic industries at low rates via government-owned banks. Useful in earlier phases of development, the approach has engendered vast industrial and financial overcapacity, which the economy must shovel into overseas markets somehow.
There is nothing wrong with trade surpluses. Yet the means by which China slowly took over 15% of the global export market – a share no country has enjoyed since the 1970’s – entailed heavy financial repression and protectionism, sloppy lending and weak environmental and labour protections. It also depended on people in other countries, particularly the United States, buying more, borrowing more, and saving less than they should. The U.S. mortgage crisis in 2008, for example, was facilitated more than somewhat by China lending the fruits of its workforce productivity to Americans at dirt-cheap rates by purchasing Treasury bonds.
Government media does talk about the need to “spur consumption”, which foreign brands and governments seeking to sell into the country’s vast internal market love to hear. Beijing does want to enlarge its middle class. But that won’t be easy or quick. In the meantime austerity remains a bureaucratic reflex.
Rising household debt, for example, may have caused officials to turn against spending on condos, pricey booze, video games and more, plus harshly pull back fintech giants like Ant for issuing easy consumer loans. In July the government shut down the for-profit tutoring industry, wrecking a swathe of listed companies on the theory that excessive education fees are deterring couples from reproducing. For similar reasons officials plan to reduce “unreasonable incomes” and reduce tax evasion by the wealthy. They are forcibly holding down home values in some cities via raw price controls.
On paper these are quick ways to increase disposable incomes without forcing employers to hike wages. But the initial effect is negative for consumption and also employment; the private education sector employed millions. Jittery investors are therefore reconsidering once-hot consumer plays. China’s benchmark CSI300 index is the world’s worst performing by far this year, down 5%. The Fidelity China Consumer Fund has shed 30% since February, per Refinitiv data.
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Chen Li, an economist at local brokerage Soochow Securities, made waves on Chinese social media in August by arguing the country should aspire to a German-style development template, not an American one. A more Germanic China might have a thicker social safety net, a lot less home ownership, and better vocational training. But it would also reinforce the already-powerful manufacturing sector, and goose overseas investment. Germany runs a current account surplus equal to 7% of output, nearly four times higher than China’s. Should the People’s Republic successfully duplicate Berlin’s approach in an economy four times Germany’s size, it could further imbalance a world economy already over-dependent on American demand to absorb excess production – and on the American dollar.
Xi’s new “dual circulation” strategy looks like an attempt to have it both ways. The president wants Chinese shoppers to have more buying power but to spend locally, which will hedge domestic firms against trade wars. Yet he also wants a powerful export sector, which proved a good hedge against the pandemic shock. This mix would push up the trade surplus and in fact looks like a modified version of the credit-intensive factory economy the Communist Party knows how to run, as opposed to one dominated by uppity internet service giants.
Trade partners must also factor in the possibility that Xi’s push will only be half-successful, boosting exports without substantially increasing domestic demand or easing inequality. Forcibly restraining the property market, where most ordinary people park their investable wealth, could easily backfire, for example.
If it were politically easy to redistribute assets and upgrade safety nets, Beijing would have already done so. This is the same country that systematically underfunded its own pensions for years, which only encouraged household frugality. Even at the peak of the pandemic, officials resisted cash handouts to households; it’s notable that retail has lagged the rest of China’s economic recovery. The world already has one Germany. That’s more than enough.