China Center Quick Note: China’s Consumption Paradox

In this members-only China Center QuickNote, Managing Director David Hoffman examines and explains the structural factors constraining household consumption in China, and the challenges China faces in transitioning to a consumption-driven economy.

The key takeaways are:

* Elevating household consumption as a growth driver is incredibly difficult from a political-economy perspective.

* The interests of the elites driving China’s so-called “State-led market economy” model are essentially pitted against the interests of households.

* The State system has fine tuned ways of exploiting household wealth for the benefit of the bureaucratic elite; and household wealth basically pays for the inefficiency of the State system.

* Unless strong policies are introduced to rectify this situation, household wealth accumulation will become increasingly constrained, and consumption increasingly directed toward non-discretionary categories – healthcare, education, housing, etc.

* The relatively wealthy segment of China’s consumer market is sizeable and attractive, but it is a small portion of the national aggregate; and new entrants to the segment are likely to dwindle in the absence of substantive policy change.

* The conceivable policy changes that could correct this situation would – if enacted – be substantially positive for foreign players in the market.

* However, if China’s consumer market remains stymied by political-economy “drag”, and the promise diminishes that rapid growth will continue unabated and that China will ultimately become the largest consumer market in the world, then this issue may even factor into location selection for MNC manufacturing, and impact off-shoring/re-shoring considerations.

* MNCs need to carefully monitor policy dynamics and developments in the finance and real estate sectors because they bear huge influence on China’s consumer markets. Business planning assumptions must be appropriately calibrated with political-economy realities.