Mainland China’s consumption lags

Unleashing savings can lift GDP, but help for small firms, jobs and incomes is needed

12 February 2021 Qu Hongbin, Chief China Economist

Mainland China’s economic growth has rebounded beyond pre-pandemic levels. But the recovery is uneven, with consumption lagging because of lower income growth and an uneven jobs recovery.

While GDP in the final quarter of 2020 was 6.5 per cent higher than a year earlier, consumption expenditure per head rose only 3.2 per cent − well below 2019’s comparable figure of 8.6 per cent.

COVID-19 initially affected consumption directly, but with cases now manageable, those behavioural effects have largely dissipated. However, pressure on the jobs market continues to weigh on the economic recovery. There are signs of weaker jobs sentiment in manufacturing and services industries. Meanwhile, we may see a slowdown in the construction industry this year as momentum in infrastructure and real estate slows. Income growth has yet to see a full recovery; in the fourth quarter it reached only 80 per cent of 2019 levels. This is indicative of significant labour market slack without a sufficient expansion of business activity and investment.

We estimate the hit to household incomes in 2020 was 1.8 per cent of GDP compared to the outcome if 2019 growth had continued. We expect income growth to gradually recover early this year, but there is a risk it stagnates.

More than half of mainland China’s 285 million migrant workers − 37 per cent of the workforce − are employed in services sectors, including catering and retail, which the pandemic hit hardest. Even the jobs that have come back tend to be lower-skilled and lower-paid or in the gig economy, squeezing migrant incomes.

Also, a record 8.74 million college students graduated last year leading to increased competition to find quality employment, which edged down average starting salaries by 5.7 per cent compared with 2019. This also caused some to defer entry into the labour market, with more graduates choosing to enrol in post-graduate studies.

And the manufacturing recovery has been uneven. While jobs in computers and electrical equipment have bounced back, the return of jobs in the furniture and garment industries has been slower.

This continued uncertainty over jobs and income has led to higher precautionary savings, even as employment improved. As the economic recovery broadens, vaccines are rolled-out, and income growth recovers and consumer confidence rises, unwinding these savings should lift consumption, potentially boosting GDP by 2 percentage points.

The pandemic disproportionately hit labour-intensive jobs including migrants’ lower-skilled service roles, while white-collar jobs were less at risk. This likely increased income inequality and can be a potential dampening factor on growth. Without a full jobs recovery, particularly in lower skilled services, the pressure on income inequality may persist.

To alleviate the slow consumption recovery, policymakers need to support a broader jobs recovery. Measures to help with job creation and help unwind some of the pent-up household demand look likely.

The loan prime rate will likely be kept at 3.85 per cent to stay accommodative. Beijing is likely to take targeted measures such as extending favourable credit conditions and tax cuts to support smaller firms. Structural reforms to level the playing field for companies can also increase business confidence and investment, which should support job creation.

Domestic demand can be spurred by facilitating urban-rural mobility and increasing household consumption through land reform and granting more migrant workers urban-household status.

Incentives to encourage consumers to spend more by upgrading durable goods like home appliances can help tap into the pent up savings. While policies can help release savings, a full recovery in income is still needed for a complete consumption revival. Without that, additional purchases of larger-ticket items would result in lower consumption of other consumer products.

First published 1 February 2021.

Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).

Disclosure and disclaimer

More, collapsed
Mexico in 2021
Demand from the US will support manufacturing while interest rates fall
Join the conversation?

Join our Linkedin group to get an unparalleled view of macro and microeconomic events and trends from a bank that is a leader in both developed and emerging markets.