China urged to think big, go hard on reviving battered consumption

Coco Wen took advantage of China's consumer subsidies to buy herself a new iPhone for about two thirds of the original price. At the same time, she's cutting spending on other things.

"I usually celebrate my birthdays with a fancy meal, but this year I skipped that," said the 31-year-old, who works for a tourism agency that pays her less than before the pandemic as Chinese people cut back on overseas travel.

"Our family’s spending habits have changed to only buying what's necessary," said Wen, who now cooks at home instead of dining out.

China's most recent major push to boost household consumption - its trade-in scheme, a version of cash-for-clunkers but for electric vehicles, appliances and consumer electronics - comes with trade-offs.

While the programme makes households spend more short-term, they ultimately reduce expenses on unsubsidised goods and services. The scheme also cuts into future spending as consumers may not replace their cars and appliances for several years.

"It could be harmful from the perspective of a five-to-six-year cycle," said Xing Zhaopeng, ANZ's senior China strategist.

Those shortcomings are raising pressure on authorities to unveil consumer-focused policies with a longer-term impact when China's rubber-stamp parliament begins its annual meeting on Mar 5.

Such moves are increasingly important as Beijing fights a damaging trade war with Washington and needs Chinese consumers to step up and purchase the products peers in other markets are now buying less of, as tariffs rise.

China leaned heavily on exports to reach its roughly 5% economic growth target last year, but even before any tariff hikes economists had raised concerns that this strategy created excess industrial capacity and fanned deflationary pressures.

"China has a serious overcapacity problem," said Louis Kuijs, S&P Global's chief Asia economist. "Domestically this is weighing on prices and profits. Externally, it is amplifying a pushback against Chinese exports. Raising consumption would really help."

On that front, Kuijs was "keen to see any plans the government has on raising its role and spending on health, education and social security" that might emerge at the National People's Congress (NPC) meeting.

VIGOROUS PLEDGES

While little is known about what new policies Beijing will unveil, officials have so far pledged to "vigorously" boost consumption this year, including by raising incomes, pensions and medical subsidies.

But scale matters.

At last year's NPC, China increased the minimum pension by 20 yuan ($2.76) to 123 yuan per month, benefiting roughly 170 million people, mainly in the countryside. But that amounts to an annual effort of less than 0.01% of its $18.6 trillion gross domestic product.

China's household spending is less than 40% of annual economic output, some 20 percentage points below the global average. Investment, by comparison, is 20 points above.

Closing that gap is a monumental task.

Analysts say it would require changes to the tax system that reverse long-standing incentives to chase capital returns at the expense of income increases and that redistribute resources to consumers from the business and government sectors.

It would also require a stronger safety net with higher pensions, healthcare and unemployment benefits that give households more confidence to spend.

Further dismantling China's internal passport system, blamed for stark rural-urban inequality, could unleash the spending power of workers who had left the countryside for city jobs.

But all these raise near-term stability and growth concerns by shifting resources away from the export sector and from President Xi Jinping's priority of developing "new productive forces" that make China competitive in the technology race.

"While Beijing has acknowledged the urgency of boosting domestic consumption, its policy response so far has fallen far short of the structural reforms needed to shift China’s economic model in a meaningful way," said Camille Boullenois, associate director at Rhodium Group.

Rhodium estimates that funding costs for the structural policy changes needed to boost consumption could amount to around 30% of China's GDP.

"Beijing has reform options available, though they vary in financial and political viability,” Boullenois said.

MORE DEBT

Premier Li Qiang is expected to announce an unchanged 2025 growth target of roughly 5% when he delivers his work report to the NPC in the cavernous Great Hall of the People next Wednesday. Any policy changes that could shock the economy in the near term are not imminent.

"We should not have high hopes on big reforms," said Xu Hongcai, deputy director of the economic policy commission at the state-backed China Association of Policy Science.

Maintaining high growth without switching to new engines of development can only be achieved through surging debt, especially when trade frictions and the property sector crisis persist.

Li is expected to announce a wider budget deficit and record special debt issuance plans for this year.

"We must ensure external shocks don't impact our economic growth," said one policy adviser on condition of anonymity.

"Boosting consumption is key, alongside efforts to boost investment and trade."