China’s Consumption Challenge

20 March 2024 / Report

Trusted Insights for What’s Ahead™

The ongoing decline of the Chinese real estate market has blown a huge hole in aggregate Chinese demand – from upstream inputs like steel and glass to downstream furnishings, etc. – that is causing a significant and foreseeably long-lasting growth slowdown.
The government’s current approach to try to fill this demand gap and sustain growth through increased industrial production, especially in new technology industries like electric vehicles (EVs), cannot work due to both deficient domestic demand and limited headroom for export growth. The unfolding situation already exhibits severe over capacity and rising trade tensions as reported widely in business media1.
Ultimately, trade tensions will limit China’s ability to significantly grow exports from their current high base, irrespective of their competitiveness. Therefore, Chinese household consumption, not exports, must provide the demand needed to drive future Chinese growth and economic sustainability.
Household consumption in China is structurally impaired due to political economy factors, like negative real interest rates that repress household income and social security from savings, in aggregate, and thus constrain consumer spending capacity. The problem is much deeper than a lull in consumer confidence due to post-pandemic malaise or cyclical factors.
China arguably has the capability, resources, and tools to undertake the reforms necessary to establish consumption as a primary growth driver. The methods to do so are empirically proven. It is a political choice, not an economic one.
It stands to reason that political preferences will eventually give way to economic necessity, and that the Chinese leadership will embark on some of the required reforms to lift consumption. There is precedence for this.
The reforms required to elevate consumption are not quick fixes. They require systemic change and will take time to manifest and to deliver dividends. Adequate and earnest reform measures, however, are likely to be greeted with strong investor enthusiasm that should help accelerate the transition process.
In the meantime, at the company level, growth through innovation will be hard won in most categories and subject to the pricing and margin pressures characteristic of a slowing, over-supplied and consolidating marketplace.