Until China changes its growth model, don’t expect any ‘revenge spending’

As China prioritises exports and investments, the country’s stimulus measures have failed to adequately boost meek domestic consumption levels
Unless leaders are willing to adopt radical solutions to boost confidence, consumers will continue to keep their wallets closed

Wang Xiangwei

Published: 5:30am, 3 Jun 2024

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In 2021, when China further relaxed family planning controls by allowing couples to have up to three children, the major policy shift was expected to trigger a “revenge” baby boom.

In late 2022 when Beijing suddenly lifted zero-Covid controls, the authorities banked on post-lockdown “revenge spending” to drive economic growth.

Late last year, the government unleashed a series of extra rescue measures to stave off an acute property crisis, raising expectations of “revenge” growth in home purchases.

All those expectations have fallen flat. As one viral joke on China’s social media goes, “[Officials] thought we would seek ‘revenge’ but underestimated our compassion. We have already let go of grudges”.

The sarcastic joke serves as a vivid illustration of one of the greatest challenges for China’s leadership: how to get the country’s reluctant consumers to spend.

This has become a matter of high importance and urgency as the Communist Party’s Central Committee is scheduled to hold a long-delayed plenum in July to discuss a new growth model at a time of great uncertainties at home and abroad.

How China rebalances its economy will also be closely watched by its major trading partners, including the United States and European Union. Both Washington and Brussels have ratcheted up the rhetoric and launched anti-subsidy investigations against Chinese companies which are flooding international markets with green tech products ranging from electric vehicles to wind turbines and solar panels.

Their argument is that China should encourage its own citizens to spend more to absorb its rising production capacity. Indeed, in 2022, China accounted for 31 per cent of global manufacturing value added and 27 per cent of global real exports, but only 13 per cent of global consumption, according to a report co-authored by Larry Hu, head of China Economics at Macquarie Group. He expected the gap to continue to widen and the risk of trade tensions to increase over time.

Ironically, China’s leadership has long recognised the importance of boosting domestic consumption, at least publicly. Over the past two decades, successive leaders have talked up the country’s supersize market with a booming middle class estimated at 400 million people and 140 million households, and rising. But, during the same period, consumption’s share of China’s gross domestic product stalled at just above 50 per cent, compared to more than 70 per cent in major economies.

Much has been written about why China’s consumers are reluctant to spend. The main reasons include their propensity to save and lack of adequate social welfare and healthcare.

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Little has been written about the fact that boosting consumption has always been a lower priority for China’s leadership, compared to exports and investments, the other two traditional engines of growth.

This has much to do with the party’s ideology and its management philosophy.

After the founding of the People’s Republic in 1949, Mao Zedong promised to build the country into a socialist paradise but directed a significant amount of resources to push for industrialisation and national defence, paving the way for China to possess all the industrial categories in the United Nations industrial classification – widely believed to be the only country in the world to be able to do so.

The concept of consumption or welfare did not enter the equation, particularly at a time when most people barely had enough to fill their stomachs.

Since China’s reform and opening up in the late 1970s, successive leaders have pursued the investment-led growth model supported by booming exports to build up the world’s second-largest economy. But they have long been averse to any whiff of welfarism which they believe encourages laziness. “Eating bitterness” is still the watchword, repeated by China’s leaders in public.

This line of thinking has reflected a deep-rooted distrust of individuals and a firm belief that the greater good overrides the needs of those individuals.

That helps explain why China’s leaders at the national level have strongly resisted suggestions to hand out cash or vouchers to its citizens to boost consumption during the three years of zero-Covid restrictions, which severely disrupted the economy.

Instead, China’s economic planners have unleashed more infrastructure investments to boost growth. Visitors to China may be impressed by high-speed railways and modern airports. However, much of that infrastructure is losing money with capacity far exceeding demand. But prioritising these investments is what China’s economic planners have been trained to do and what they know best.

As trade tensions with China’s major trading partners are set to worsen, the pressure on Beijing to spur household consumption is getting more acute. But the best option economic planners can come up with is to launch a nationwide drive of encouraging consumers to trade in their old goods including electric appliances and cars for new ones at subsidised prices.

A far bigger headache is the falling confidence of China’s 400-million-strong middle class. Their wealth has suffered a severe beating due to the sharp falls in the stock market and real estate over the past few years.

Unless China’s leaders undertake a fundamental rethink of its growth model and plan radical moves to spur consumption, consumers will most likely choose to mind their wallets rather than pulling them out for some “revenge spending”.

Wang Xiangwei is a former editor-in-chief of the South China Morning Post. He now teaches journalism at Baptist University