Shrivelling consumption puts China's economy in peril
More than half of China's new stimulus measures have yet to be released. State-owned giants invest heavily in artificial intelligence
Our briefing on key economic and financial developments in China as of Friday, 25 October, 2024:
Shrinking consumption could put China’s economic growth prospects in peril for 2024, with policymakers pushing for growth in household spending.
NDRC says over half of China’s stimulus measures have yet to be released, following widespread disappointment over the vigour of policies already unveiled.
State-owned giants have stepped up investment in cutting-edge technologies over the past five years, including artificial intelligence and quantum technology.
Shrivelling consumption puts China's economy in peril
Leading Chinese economist Zhang Yu (张瑜) has sounded the alarm bells over ailing levels of consumption in the domestic economy.
The latest official data indicates that Chinese consumption has continued to come under pressure, despite strenuous efforts by Beijing to boost household spending.
In the third quarter of 2024, social retail growth came in at just 2.5%, while in the mega-cities of Beijing and Shanghai it turned negative for the months of July and August.
Zhang, a researcher from the International Monetary Research Institute of China's prestigious Renmin University, points out that domestic consumption's economic contribution ratio dropped to 49.9% for the first three quarters of 2024, as compared to 60.5% for the first half.
The weakness of domestic consumption has put heavy pressure on Chinese exports as a source of economic support, yet trade has already reached levels which are unsustainable over the long-term, particularly given Beijing's worsening tensions with advanced economies.
Zhang points out that for the first three-quarters of 2024, net exports of goods and services drove 1.1 percentage points growth in Chinese GDP, which is "an extremely high level in historical terms," even given China's export-driven growth since the turn of the century.
Export figures are already starting to weaken, with growth falling to 2.4% in September, and JPMorgan's PMI index falling beneath the 50 point threshold for a third consecutive month.
According to Zhang, this makes it imperative for China to boost domestic consumption in order to sustain economic growth.
“In future, we will need to rely even more on recovery in domestic demand, and consumption in particular, to offset the weakening of external demand."
Zhang highlights four effective means of boosting Chinese consumption that policymakers have at their disposal:
1. Stabilizing household wealth. Zhang stresses in particular the wealth effect that could be created by improvements to share and housing prices in spurring household spending, with policymakers also stressing these measures at key press conferences held on 24 September and 17 October.
2. Stabilizing household incomes. Zhang called for policymakers to provide more targeted fiscal support to low and medium-income demographics whose incomes have come under pressure.
3. Stabilizing spending on consumer durables. Zhang stressed in particular new policies to drive growth in purchases of consumer durables such as electric vehicles.
4. Stabilizing fiscal expenditures. While many domestic and international observers have expressed disappointment with the scope of China's fiscal support package unveiled towards the end of September, Zhang points out that full policy details will only be unveiled next year after the Two Sessions congressional meetings in the first quarter.
Zhang nonetheless is of the opinion that "based on available information at present, the central government's willingness to raise debt is quite sufficient."
More than half of China's new stimulus measures have yet to be released: NDRC
China's planning commission said that a raft of further stimulus measures are still on their way, as Beijing seeks to ensure that the national economy hits its 5% growth target for 2024.
"At present, around half of the quantitative increase policies have already been released, with the remainder to be rapidly unveiled," said an official from the National Development and Reform Commission (NDRC) to National Business Daily.
NDRC officials said the policies would cover a total of five areas including:
Strengthening counter-cyclical macro-economic adjustment policies.
Further expanding domestic demand.
Expanding the vigour of assistance for enterprises.
Arresting the fall in the property market and restoring its stability.
Invigourating capital markets.
Upcoming policy measures will focus on education and improvements to human capital, including:
Raising the level of student assistance subsidies and expanding the scope of policy coverage.
Raising the quotas for national student assistance loans for undergraduate and postgraduate students, as well as driving reductions to interest rates.
Expanding the issuance areas for special bonds to the greatest extent possible.
Key measures already released include:
Bringing forward 100 billion yuan in central budget investment plans originally scheduled for 2025.
The 100 billion yuan "Two Heavy" (两重) project development list.
Reductions to the required reserve ratio and policy rates.
Adjustments to residential housing purchases restrictions.
The NDRC said that it would target increases in foreign investment and improvements to the state-owned enterprise sector, with measures to include:
Accelerating amendments to expand the list of industries where foreign investment is encouraged.
Formulating guidance lists for optimisation and structural adjustments of the state-owned economy.
2025 will also see China continue the issuance of ultra-long-term special treasury bonds. 700 billion yuan out of 1 trillion yuan in ultra-long-term treasuries issued this year have already been used to fund "Two Heavy" projects.
The Private economy a priority
The NDRC flagged the accelerated launch of new policies to drive growth of China's private enterprise and increase its contribution to the national economy in key sectors such as electric vehicles, integrated circuits and 3D-printing.
Foreign trade by private enterprises in China rose 9.4% in year-on-year terms for the first three quarters of 2024, 4.1 percentage points ahead of overall growth to account for a 55% share of overall trade.
Exports by private enterprises in China rose 8.9% during the period, 2.7 percentage points ahead of the overall figure.
China's giant state-owned enterprises invest heavily in artificial intelligence
Investment by China's central state-owned enterprises (SOEs) in strategic emerging industries totalled 1.4 trillion yuan for the first three quarters of 2024, for a year-on-year rise of 17.6%.
According to officials from the State-owned Assets Supervision and Administration Commission (SASAC), these industries included artificial intelligence, aerospace, clean energy, new materials, high-end manufacturing, pharmaceuticals and quantum technology.
SASAC data further indicates that central SEO investment in strategic emerging industries rose from 700 billion yuan to 2.18 trillion yuan during the period from 2018 to 2023, rising from 12.8% to 35.2% of total investment.
Total investment growth was 204.8% for the period, for per annum growth of 24.97%.
Officials said to state-owned media that strategic emerging industries are an area of critical focus for Chinese industrial policy, and key areas for the creation of new competitive advantages.
SASAC recently unveiled a raft of new support policies for these sectors, as well as established specialist funds to spur central SOEs to accelerate the development of strategic emerging industries.