China to Focus on Consumption

In China, the local leadership has promised to pay high-level attention to stimulating consumer spending.

In the context of the mentioned official statement by the authorities of the Asian country, it is worth noting that Beijing is currently engaged in a kind of struggle for economic growth. The results in the relevant area of applying efforts have recently demonstrated the tendency of a marked deterioration. In the second quarter of the current year, the Chinese economy grew by 4.7%. The relevant information was published by the National Bureau of Statistics in July. At the same time, China’s economy grew by 5.3% in the first quarter of 2024. It is worth noting that the rising target of the corresponding indicator set by Beijing for the current year is about 5%. The results recorded in the second quarter indicate that China is moving away from the materialization of the mentioned goal.

The formation of the economic situation in the space of an objective reality, which Beijing assesses as a kind of target scenario, is hampered by weak domestic demand. The positive results of China’s export activities do not compensate for the negative impact of low consumption in the Asian country’s market.

The mentioned state’s media reports that following the meeting, which was attended by more than 20 high-ranking officials led by President of the People’s Republic of China Xi Jinping, a statement was made that the focus of economic policy should be shifted towards improving people’s livelihood and stimulating spending. Officials also promised to take several new measures to support the economy. In the context of this issue, they did not elaborate on their intentions.

In July, Xi Jinping published his blueprint for cutting-edge manufacturing designed to propel the world’s second-largest economy forward. It is worth noting that China’s economic system periodically faces the need for new reforms. At the same time, in this context, an important fact is that against the background of technological progress and various changes in the geopolitical space, updating the concept of development of the state cannot be a static strategy, since the conditions of the external environment are being transformed. Advanced technologies are revolutionizing production methods. Geopolitical changes are often the reason for the transformation of supply chains and make significant adjustments to trade relations at the global level. Against the background of these realities, which can also be characterized as a kind of permanent property of the matter of the existence of human civilization, economic reforms or at least making changes to a pre-approved development model are not just a condition for competitiveness, but a necessity that determines the country’s ability to survive in the practical plane. Each historical moment has its own specifics, which are manifested, among other things, in the economy, the social sector, politics, and the cultural environment. Realities of modernity, relevant in a specific period, is a fact, ignoring which is the beginning of a path in the opposite direction to development.

The media notes that Chinese political leaders, stating priorities in the economy, could to some extent downplay the complexity of the current state of affairs. Beijing should reconsider its initial plans, as the present challenges require a response. Currently, consumer sentiment in China is subdued due to circumstances such as the protracted crisis in the Asian real estate sector and the weakness of the local labor market.

It is worth noting that the market has perceived Beijing’s promises through the prism of skepticism. Experts say that the Chinese authorities should present a more specific action plan in the economic space. In their opinion, the current statements and formulations of the authorities of the Asian country are too abstract and do not contain unambiguous theses. There is a circulating opinion among experts that Beijing should expand fiscal stimulus, which is restrained this year.

Investors continue to bet on China’s 10-year government bonds. This week, the yield on the relevant bonds fell to around 2.14%, which is a new low. The benchmark CSI 300 Index for onshore stocks closed 0.6% lower on Tuesday, July 30. Turnover in a basket of eight exchange-traded funds known to be picked up by the sovereign wealth fund totaled around 16 billion.

Michelle Lam, Greater China economist at Societe Generale SA, says that the authorities’ desire to stimulate the weak side of the twin-track economy of the Asian country was a good shift, but in this case, there are not enough details. According to the expert, policymakers can still focus on improving the supply of services to stimulate consumer demand. Michelle Lam also suggests that Beijing is not considering using unconventional methods to restore weak investor confidence.

To maintain the economic growth of the Asian country, which is showing insufficient pace in terms of the target, the People’s Bank of China has made an unexpected decision to cut interest rates. At the same time, the local Ministry of Finance has allocated funds raised by special sovereign bonds to finance a cash-for-clunkers program to stimulate consumption.

The Chinese authorities have also made broad commitments to increase household incomes and raise the willingness and ability of low-income groups to spend money. In the context of the relevant commitments, the leadership of the Asian country specifically mentioned sectors such as services, tourism, and care for the elderly. Chinese ministries are expected to publish detailed plans to boost economic activity in the coming months. Preliminary statements on appropriate measures did not become a factor contributing to the growth of confidence in the world’s second-largest economy.

Li Minghong, a fund manager at Beijing Yikun Asset Management LP., says that the market has become less sensitive to China’s policy, which, according to consensus opinion, is assessed as positive in the long term, but at the same time ineffective in terms of the ability to solve short-term problems. In this case, the strategy of the economic policy of an Asian country is implied.

At the same time, the statements of the Chinese authorities indicate the formation of a more realistic understanding of the problems. Beijing now recognizes that the world’s second-largest economy is facing the negative impact of weak domestic demand. The leadership of the Asian country also publicly draws attention to the fact of adverse changes in the external environment. In this case, it implies protectionist measures in the states to which goods are supplied from China. After the end of the coronavirus pandemic, the volume of export activity in the Asian country rose dramatically. Beijing’s efforts in this area are increasingly being stimulated by value-added goods, including electric vehicles. Against this background, China’s imbalance with its trading partners is increasing.

Washington and European capitals have repeatedly criticized Beijing for exporting industrial overcapacity to other countries of the world. The Chinese authorities do not agree with the mentioned claims. This year, the European Union has imposed increased tariffs on electric vehicles supplied from the Asian country. Also in 2024, the United States increased similar tariffs.

The Chinese authorities intend to rely on market competition. Beijing is convinced that the corresponding strategy of action will avoid the bankruptcy of inefficient companies, as the ongoing domestic price wars exacerbate the longest deflationary streak of the Asian country in the last 25 years.

Tommy Xie, head of Asia macro research at Overseas-Chinese Banking Corp., says that the current statements by the Chinese leadership demonstrate a more realistic short-term assessment of the condition of the economy, paving the way for additional support measures. According to the expert, Beijing’s fiscal policy can do more to support consumption.

The Chinese leadership also calls for the prevention of involution competition within industries. This statement was made against the background of the fact that the average working hours in the Asian country for company employees have increased to a record 49 hours.

Chinese officials are also seeking to reduce worries and concerns about the prospects for the world’s second-largest economy. According to them, the current problems are temporary difficulties. They argue that the outlook is positive as the economy transitions from old driving forces to new ones.

Xi Jinping is currently seeking to wean China of decades of debt-driven boom-and-bust cycles. He is committed to ensuring that the Asian country achieves technological sovereignty. To a large extent, the mentioned efforts are associated with increased tension in the space of relations between Beijing and Washington. The result of this situation has already been the restriction of Chinese companies’ access to advanced chips and equipment necessary for the production of microcircuits of the appropriate category. Technological sovereignty is essential for Beijing. The ability of autonomous provision in the area of production of advanced technological products determines the economic potential of the country and its competitiveness at the global level. Moreover, the experience of the coronavirus pandemic, when the functioning of supply chains was disrupted due to various restrictive measures, confirmed the importance of the mentioned sovereignty.

As part of countering the crisis in the real estate sector, Beijing has decided to support municipal authorities in buying and turning unsold homes into state-subsidized public housing. Officials also promised to complete the construction of delayed units.

The central political leadership of the Asian country is convinced that continuous efforts should be made to further support the economy. Officials were also advised to accelerate the issuance and use of special municipal government bonds, which are the main source of funding for infrastructure projects.

In China, government spending has lagged expectations in 2024. Fiscal expenditures in the first half of the current year decreased by almost 3% compared to the figure for the same period in 2023.

Zhang Zhiwei, chief economist at Pinpoint Asset Management, says that there is currently no understanding as to whether China’s fiscal policy will change in the second half of 2024 to become much more supportive.