China does not have pain-free solutions for its slowing economy

BEIJING/HONG KONG (Reuters) – Irene Yao wants to take street dance classes and travel, activities she has been unable to do in three years of COVID-19 restrictions in China.

Rather than pursue such goals, as many economists expected consumers would once China lifts those restrictions, it is saving more of its paycheck than it did during the pandemic, when it felt compelled to stock up on basic necessities.

“I like to ask myself if I have enough savings to treat an unexpected illness. If I lose my job, do I have enough money to support myself until I find a new one?” said the 30-year-old book editor.

Yao’s reluctance to spend is a result of an economic growth model dating back to the 1980s that many say relied too much on investment in real estate, infrastructure and industry and not enough on enabling consumers to earn more and buy more.

But, while faltering growth in the world’s second-largest economy has given a new sense of urgency to rebalance, shifting economic resources to households will require difficult decisions that will cause more pain in the short term.

Specifically, an increasing share of households in national income means a lower share for other sectors, both firms – especially China’s sprawling industries – and the government sector.

“Their downfall will make a recession inevitable,” said Juan Orts, a China economist at Fathom Consulting.

“We think this is the price Beijing is unwilling to pay,” said Orts, who sees China heading towards “Japanese snoring,” referring to Tokyo’s “lost decades” of economic stagnation since the 1990s.

safety net

In theory, Yao could spend more if she finds a job that pays her more than her monthly salary of 8,000 yuan ($1,097), which is less than a fifth of what book editors earn in the US, according to job site Glassdoor.

But China’s labor market is weak, with youth unemployment at record levels of more than 21%.

The private sector, which is responsible for 80% of new jobs in urban areas, is still recovering from strict regulatory measures imposed on technology and other industries.

Policymakers pledged to boost credit to businesses, but businesses are ultimately constrained by weak domestic demand.

Another way to get people like Yao to spend is to address their concerns. Many economists called on China to strengthen the social safety net to rebalance the economy.

In Beijing, where Yao lives, unemployment benefits for three to 24 months amount to 2,233 yuan a month, just under what she pays for her 12-square-meter room in rent.

Her parents live in rural China and will soon reach retirement age, after which they can each receive annual pensions of as little as 1,500 yuan.

Yao spends 300 yuan a month on her father’s medicines, which is the same as dancing lessons.

“If the general medical insurance covered more expenses for the elderly, I would feel more secure,” Yao said.

She added that financial uncertainty also discourages her from having children. China’s population is aging and shrinking, especially in the 20-40 age group, when people usually reach their lifetime peak consumption.

Sizes

Over the past month, various government departments have announced dozens of measures to boost consumption, in response to calls from a key meeting of the Communist Party leadership.

These measures include subsidizing cars and home appliances, extending restaurant opening hours, and encouraging tourism and leisure activities.

Yao was unimpressed and preferred consumer vouchers, which are issued by some local governments in China, but in quantities too small to matter on an aggregate level.

The companies are similarly unenthusiastic.

“We haven’t really seen anything in terms of really boosting demand,” said Jens Eskilund, president of the European Chamber of Commerce in China, adding, “That would be more important than supporting the supply side.”

Revenue has been declining, says Wang Jiliu, 45, who owns a catering business on the Chinese island of Hainan, partly because people’s income has not improved much since the epidemic.

This, in turn, affects their spending habits.

“I think the same way: I will also control my desire to shop,” Wang said. “In the past, we would eat out and travel, and we don’t do much anymore.”

Proposals for demand-side measures by economists include better and more widely available public services, higher social benefits, greater legal bargaining power for workers, or distributing shares of state-owned enterprises to citizens.

But who pays? The additional burden on firms – through, for example, increased social welfare contributions – is another blow to employment and growth. This leaves the government sector dealing with the municipal debt crisis.

Local governments, while short on cash, are rich in assets. The net assets of non-financial state-owned enterprises reached 76.6 trillion yuan in 2021.

Michael Pettis, a senior fellow at the Carnegie Endowment in China, estimates that if Beijing forces local governments to transfer 1-1.5% of GDP to households, China can sustain current growth.

“The wealth and power of local governments, businessmen and financial elites often depend on controlling those assets,” he said.

“One of the really big conflicts between Beijing and local governments is likely to be over how to allocate the various adjustment costs. This will become one of the most contentious political issues over the next couple of years.”

($1 = 7.2904 CNY)

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