China’s shops and restaurants are gradually re-opening as coronavirus is contained. Local governments are trying to spur economic activity with some residents given consumption vouchers worth up to USD14 or their working weeks shortened to induce them to go out again. But how strong will the consumer rebound be?

Anecdotal stories suggest that there is some pent-up demand but there are also reasons to be cautious.

Unemployment has already risen and could reach 8.3 per cent by mid-year before falling back. The service sector accounted for half of China’s jobs before the pandemic, with the restaurant and retail sectors alone employing 40 million directly plus another 80 million self-employed people.

Labour market shocks of this magnitude hurt wage growth and wages account for 60 per cent of urban household income.

The usual time lag suggests that even if the economy recovers in the second half of the year, urban household income will still see an unprecedented contraction before stabilising in late 2020. But the contraction could be bigger and longer-lasting because weaker business and investment income will also hit earnings.

And after a big run-up in the housing market between 2016 and 2018, many households’ debt has increased considerably. China’s overall household debt rose from 18 per cent of GDP in 2010 to 44 per cent in 2019 with mortgage debt more than doubling since 2016.

Outstanding mortgages are now equivalent to 84 per cent of urban disposable income compared with under 50 per cent in 2014. Including rents, housing costs absorb 35 per cent of urban disposable income.

That said, people have little other debt, so households’ balance sheets look healthy. But expectations of a sharp fall in income growth combined with the high cost of housing mean that consumption will likely be crowded out.

Despite strong income growth over recent years, China’s propensity to consume has declined from over 80 per cent in the early 2000s to around 66 per cent as people save for house purchase, health care, education and retirement.

Food and clothing are least affected by changing incomes and education, culture and entertainment look fairly resilient. But rent, travel, telecoms and durable goods are much more sensitive.

China’s policymakers can help by cutting interest rates to support consumption and mitigate the economic damage of COVID-19, but that is not enough. People still prefer to put saving before consumption, so monetary easing alone is likely to have only a limited effect in stimulating demand.

Further policy measures, ranging from loosening banking regulations to using fiscal reserves and expanding central-government debt could be needed.

First published 15 April 2020.

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