In a new research briefing, Phyllis Papadavid, Director of Research and Advisory at Asia House, takes a closer look at China’s domestic economy, and how the consumer sector will be essential for the country’s growth strategy.
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• China’s economy is transitioning to a new model, in which prospects for higher quality growth, and for its long-term economic recovery, depend increasingly on its consumer sector.
• Broader digitalisation and the facilitation of China’s cashless ecosystem, including through the expansion of the e-CNY, bode well.
• Uncertainty in relation to the price outlook for basic goods, future labour market developments, and the rural-urban income divide, constitute key risks.
• The impacts of China’s domestic growth policies will be felt among its trading partners in Asia.
China’s growth slowdown continues, with persistent downside risks. Ultimately, the prospect for higher quality growth, and for China to re-embark on its potential growth path, lies with its consumer sector. In the near term, volatility and uncertainty in inflation will limit household spending. Additionally, China’s urban-rural divide, and the disparities this creates, is a structural impediment over the longer term.
Significant progress in digitalisation, and China’s leadership in e-commerce and in its cashless ecosystem, augurs well for the outlook. The broader, trade weighted strength in the renminbi will also boost Asian countries that benefit from its demand, particularly Japan and South Korea.
China’s economic and household sector outlook
In 2023 and beyond, China’s potential growth path will hinge on fostering higher productivity and boosting household consumption. For now, China’s growth slowdown continues, driven by COVID-19 related restrictions, high debt, and stagnant investment. Building a skilled and resilient workforce in 2023 and beyond is essential for the government’s aim of genuine growth driven by dual circulation.1 This Asia House report examines three structural pivot points for consumers: China’s cashless ecosystem, the e-CNY, and the renminbi.
Global monetary tightening in the form of higher interest rates could reveal further ‘landmines’ (Martin, 2022) including in relation to China’s domestic debt. The degree to which its household sector not only recovers – but takes over as an engine for growth – will be essential given stagnant domestic productivity and China’s workforce having stopped expanding. Long run growth, and the prospects for China’s trading partners in Asia, hinge on a strategy that strengthens household consumption and productivity in China.
The significance of China’s household sector
An acceleration in consumer spending growth will underpin China’s post-COVID economic recovery. Consumption is an essential driver of growth and represents more than half of GDP in most developed countries (Chai, 2018), including in China where it is around 55 per cent of the economy.2 Consumption also can dictate the composition of industry. There are wider impacts, in that shifts in household spending create opportunities for new industries. They trigger innovative activity as entrepreneurs and firms seek growth via product innovation (ibid, 2018).
Stronger and broader-based consumption will play an important role for China’s long-term growth strategy that has been delineated by key policies in recent years, including the “Dual Circulation” strategy, the “Common Prosperity” initiative and achieving “genuine” growth, whereby realising “high-quality development” was added to the Chinese Communist Party (CCP)’s constitution. The emphasis of these policy frameworks at the recently concluded 20th Party Congress once again illustrated that economic structure re-orientation towards the domestic market remains one of China’s top priorities.
“Economic structure re-orientation towards the domestic market
remains one of China’s top priorities.”
For instance, the Dual Circulation strategy aims to spur domestic demand (internal circulation) and simultaneously develop conditions to facilitate foreign investment and boost production for exports (external circulation). Common Prosperity, on the other hand, seeks to create a more equal society by raising the incomes of low-income groups, promoting fair competition, and better balancing regional development, among other goals. Going forward, economic growth figures will no longer be the only mechanism to gauge China’s progress. Instead, growth will be closely associated with measures around boosting consumption and increasing the middle class that, in turn, could further consolidate the household sector.
The rural-urban divide will limit consumption growth
China’s rural-urban divide persists. China’s urbanisation has meant that economic growth directed by the central government resulted in a prioritisation away from rural development in the past (Yang and Wu, 2015). However, rural revitalisation, which was identified as a priority at the 19th Party Congress in 2017, represents a critical component of China’s 14th Five-Year Plan (2020-2025) and the CCP’s longer term objective of “building a modern Socialist country by 2049”.
Hukou policy3 is seen by some to have privileged urban residents with comparatively more entitlements, such as better access to healthcare, education, life-time employment and pensions. Diversified incomes have provided some farmers with a comfortable living in line with urban hukou residents in nearby cities, yet rural migrant workers are seen as economically marginalised due to barriers to social inclusion, such as restrictions attached to Hukou (Rozelle and Boswell, 2022; Li, 2010).
Urban expansion has also reduced the income divide (Zhong et al., 2022). However, China’s urban-rural income and consumption gaps coincide with labour productivity gaps. In both manufacturing and services, specialisation is generally higher. Additionally, inequality has been exacerbated by the COVID-19 pandemic that disproportionately impacted rural migrant workers. Rural per capita income was RMB12,297 (US$1,882) in the first nine months of 2020, only 37.5 percent that of urban dwellers (Mankikar, 2022).
China’s households face a spectrum of downside risks
While China’s consumption growth deceleration appears to have bottomed in the middle months of 2022, the outlook remains sombre. At 2.8 per cent, consumer price inflation remains within the government’s target, but is likely to continue to accelerate due to fuel and food prices, which will weigh on sentiment. This will translate into muted growth in spending, particularly on discretionary household items. Ensuring the supply and price of basic consumer goods will be important amid intermittent shortages4 (and price-gouging) during COVID-induced lockdowns5 as logistics chains were disrupted. At approximately 20 per cent of the labour force, China’s high youth unemployment rate will also limit spending.
Consumption is the core driver of “internal circulation”: China’s stretched mortgage market and persistent domestic labour market weakness are key downside risks. In the longer-term, from a structural perspective, developing China’s primary and secondary mortgage markets is key (Zhihua, 2015), as is increasing investment in its human capital base (Rozelle and Hell, 2020) as featured in the recent communications of the 20th Party Congress (Mao and Ogborne, 2022). A silver lining for consumption and for import demand has been autos: although annual growth in vehicle sales has slowed, it remains in the double digits.
China’s digitalisation, including the e-CNY, will propel consumers
COVID-19 was an accelerating factor in driving digital use. However, Chinese consumers were already more digitally linked than their global peers. Technological advances and online retailers have transformed consumer behaviour and have encouraged sales (Xiong et. Al., 2019). Digitalisation has boosted consumer demand for bespoke experiences and product customisation, making China a bellwether for e-commerce and consumer demand for digital products that are likely to continue in a post-pandemic world (Cheng, 2021).
China’s e-commerce sales are well ahead of the world in volume. Even before COVID-19, it had led in digital adoption with the largest digital consumer base of more than 780 million consumers and absolute e-commerce sales at more than three times that of the US.6 Additionally, live commerce7 has accelerated further with COVID-19 and has seen exponential growth, largely through Alibaba’s Taobao Live, Baidu and JD.8 China’s Ministry of Commerce data show that over 10 million livestreaming e-commerce programmes were broadcast in the first half of 2020 at the start of the COVID-19 pandemic.
China’s cashless ecosystem: The e-CNY
Usage of the e-CNY9 has accelerated. It has been officially launched for iOS and Android on Chinese app stores. And ahead of the 2022 Beijing winter Olympics, WeChat announced e-CNY as a payment option for its 1.2 billion users (Tabeta, 2022). In April 2022, the People’s Bank of China (PBOC) announced it would expand the digital yuan pilot programme to 11 more cities, including the areas of Beijing and Hebei Province that hosted sites for the 2022 Winter Olympics and Paralympics.10
The rise in cashless payments alongside mobile phone adoption and existing e-payment platforms, such as Alipay, has boosted financial inclusion, lending, fiscal transfers (Ouyang, 2022) and private-sector competition (Dychtwald, 2021). Typically, in China, the use of cashless payment in a month increases the likelihood of gaining credit in the same month by 56.3 per cent; and the low entry barriers make the technology accessible for the financially underserved (ibid, 2021).
“With volumes having surpassed the US$14 billion mark,
the digital renminbi is the most adopted central bank
digital currency globally.”
The e-CNY in an international context
Currently, the digital yuan app is only available on Chinese app stores and via Chinese banks11 with the principal aim of supporting domestic day-to-day retail payment volumes. However, there is likely to be growing usage, with volumes having surpassed the US$14 billion mark, making the digital renminbi the most adopted central bank digital currency (CBDC) globally.12 The ability of the e-CNY to function as a secure payment option outside of China will be essential in its cross border usage, particularly in the light of recent US-based concerns regarding data privacy and proposed bans on applications that use e-CNY payment methods.13
Boosting the Chinese currency’s global profile would require a robust ecosystem around e-CNY as the increase in multiple CBDCs across the world is continuously changing the landscape. In late September, the mBridge project14 — that facilitates cooperation regarding CBDC cross-border payments — completed its first pilot test with four CBDCs including e-CNY, supporting more than US$22 million in foreign exchange transactions. This pales in comparison to the US$13.8 billion for e-CNY domestic pilot projects, underscoring its largely national orientation.
China’s consumers as a regional and global growth driver
It could be that, as some have posited, China continues to become more economically insular from the international community (Blanchette and Medeiros, 2022). It has long been the case that economic development was the administration’s top priority. A turnaround in its job market and in the prospects for its household sector is of particular importance – both globally and for the region.
China’s economic growth, and impetus from its domestic demand, holds particular importance for its trading partners given China’s import demand for its neighbours’ goods and services. The pathway is likely to hinge on the following:
- Strength in the renminbi will support China’s economic neighbours via import demand for certain goods. Since mid-April, the renminbi has fallen sharply against the dollar and it is now down to levels last reached in 2008. As with other central banks, authorities have sold the US dollar to support the renminbi, as a part of its broader management of its capital markets (Clayton et. Al., 2022). However, the trade-weighted renminbi is higher, particularly against the Korean won and the Japanese yen – two countries that have benefited from China’s import demand.
- The rise in China’s youth unemployment will limit spending significantly if it becomes entrenched. A structural deterioration in the labour market will deepen if entry (or re-entry) into the workforce is prolonged as skills mismatches could grow. Approximately one in five 16-to-24-year-olds in urban areas are now unemployed, according to the ILO. And economic challenges will continue to be exacerbated by combinations of shocks, including factory shutdowns, ongoing trade tensions, domestic debt developments such as in the property sector, or the economic impacts of policies such as zero-COVID measures.
China’s economy is transitioning to a new growth model. Additionally, it is increasingly clear that its policymakers have a fine balancing act as the zero-COVID policy is maintained alongside the necessity of maintaining economic growth. China’s household sector, and consumer spending in particular, will be underpinned by its digital economy. It also needs to be predicated on structural shifts in the urban-rural divide and targeted employment measures for its human capital development.
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2. Consumption share taken from World Bank World Development Indicator database.
3. China’s household registration system is termed “hukou”. Institutional constraints and the ease of labour migration to urban centres created a population of migrant workers, who have physically resided in cities for an extended period of time but are officially regarded as rural citizens (Wong et al., 2006).
7. Live commerce is defined as live video streaming and e-commerce shopping services wrapped in one platform facilitating real-time purchases.
9. The e-CNY, also known as the digital yuan and officially called the Digital Currency Electronic Payment (DC/EP), is a digitised version of China’s legal currency and is issued by the People’s Bank of China.
11. Foreigners are currently only able to access limited functions in the digital yuan app as a Chinese identity card is required for some of the wallet options.
12. The PBOC announced that its central bank digital currency (CBDC) has seen transaction volumes surpass US$14 billion since the pilot began in 2020: https://mp.weixin.qq.com/s/mrc_vPXAZf4glX9_NEfmUQ
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