Mainland China’s recovery is well underway. GDP shrank 6.8 per cent year-on-year in the January-March quarter but rose 3.2 per cent in the second quarter. However, the recovery is uneven, with private consumption lagging.
The disruption from coronavirus has affected incomes but also changed consumers’ behaviours. The 9.3 per cent year-on-year fall in real consumption in the first half of 2020 far exceeded the dip in incomes. This suggests that besides the impact of lost income, behavioural effects played a large role in the collapse in consumption. And as private consumption constitutes 39 per cent of GDP, a sustainable recovery requires a rebound in consumer spending.
More than 50 million migrant workers who returned to their hometowns have now come back to the cities but it is too soon to say the labour market has fully recovered. Although real disposable incomes are rising again, the rate is far below past levels: we estimate first-half national pay was about 720 billion renminbi (USD100 billion) compared with pre-pandemic expectations, with self-employed and catering workers hit hard.
And not all jobs are equal. While construction jobs have rebounded and policymakers have encouraged flexible employment, including gig-economy jobs, these are lower-paid jobs with volatile income and less stability. Even as the recovery continues, companies may continue downsizing or reducing wages to cut costs in the uncertain environment.
But temporary job losses could lead to permanent scarring. Accepting lower productivity, lower-income jobs, can affect lifetime earnings, wealth generation and skill development, impacting future economic growth.
Lockdowns curbed spending, but even as restrictions ease, consumers are cautious and their preferences have changed. Household savings deposits were 14 per cent higher in June than a year earlier and people will continue to save to hedge against future uncertainties.
Online spending has jumped but, as with total purchases, people are buying more necessities rather than discretionary items: food and rent expenditure increased while clothing and entertainment contracted sharply.
Beijing has said reviving domestic demand must be a key policy focus. That means addressing lost income and jobs.
Tax exemptions, subsidies and reducing purchase restrictions would encourage large-ticket purchases, including electric cars, or replacing old home appliances.
And policymakers should prioritise creating jobs for almost 9 million college students graduating this year, including positions in state-owned enterprises. Skills-training could help displaced low-wage and migrant workers – and possibly cash hand-outs and wage subsidies.
Weak profits, high stocks and uncertainty about US-China tensions mean private-sector investment lags the public-sector. We thus expect targeted measures for harder hit firms, particularly manufacturers and small businesses, plus actions to support households and stabilise the job market.
Further reforms can level the playing field between state-owned and private enterprises to encourage longer-term investments and healthy competition. Public spending on infrastructure projects and fair access to credit would also help private businesses – as would lowering the loan prime rate by 30 basis points, plus expanded government credit guarantees for hard-hit firms.
Mainland China can reduce its list of industries restricted to foreign investors and more free-trade zones would encourage foreign direct investment. Regional trade agreements and engaging with international organisations like the WTO and WHO could provide a cushion against US-China tensions. Opening up to the world can also help increase collaboration, improve technological upgrading and attract foreign investment.
First published 10 August 2020.
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