China’s Consumer Spending Puzzle is Missing a Piece: Disposable Income

Beijing’s repeated plea for consumers to spend more has spawned a popular meme on Chinese social media: why does my government still believe I am rich? And what should I do to let my government know I am actually broke?

The lines contain certain truths about the nature of consumer spending. At the end of the day, people’s level of consumption is determined by their disposable income and expectation of future income. It’s very difficult to ask them to spend more when they are poor, indebted or highly uncertain about the future.

While the Chinese government seems resolute, or even desperate, in asking people to loosen their purse strings, as demonstrated by the latest policy package published by the State Council on Monday, plans on how to increase people’s incomes were distinctly omitted.

The outlined measures, which cover a wide range of areas from new energy vehicles to tourist attraction tickets, are based upon the notion that Chinese consumers have the ability to spend, and that supply-side tweaks – such as prolonging the opening hours of restaurants – can unleash hidden consumer power.

Those measures may have a point: China’s household savings in 2022, for example, increased by 17.8 trillion yuan (US$2.49 trillion).

The policy paper reads like a massive sales pitch to the Chinese people, but despite its comprehensive and detailed measures, it once again skips over the fundamental problems that underlie the country’s weak consumption.

The biggest reason for China’s anaemic consumer spending, if measured by the share of household spending in national GDP, is the country’s wealth distribution system, which favours the state.

Few countries in the world can rival China when it comes to throwing magnificent parties and erecting breathtaking architecture, but the nationwide per capita disposable income remained relatively low at 36,883 yuan in 2022.

China’s pandemic controls in the past three years dealt a heavy blow to the incomes of gig economy workers, small business owners and private sector employees. Believing that people who are struggling to make ends meet will spend more just because the government asks them to is simply wishful thinking.

In addition, while the conventional wisdom is that Chinese people tend to over-save, it is no longer the case. Borrowing has become ubiquitous in the country, particularly among the younger generation.

China’s central bank data shows that outstanding household mortgage loans were 38.6 trillion yuan as of the end of June, and it is already a struggle for many households to repay loans in a timely manner amid the economic slowdown.

The real trick to driving consumer spending, therefore, is to focus on incomes and expectations.

For instance, it is quite common for governments around the world to hand out cash, or, in Hong Kong’s case, quasi-cash consumption vouchers, which were given away during and after the pandemic. But China has refrained from giving any meaningful direct subsidies to consumers, even though the Chinese public went through huge economic disruptions.

Another issue is the unwillingness to change structural problems underpinning China’s lacklustre consumer spending.

For example, China’s progressive individual tax system with a maximum rate of 45 per cent, as well as hefty mandatory social welfare contributions, are clearly detrimental to consumer spending, but there seems to be little hope that things will change.

It is also interesting to ask whether consumer spending is the cause or consequence of economic growth.

The Chinese government, in face of an economic downturn, obviously views consumer spending as an engine for propelling growth and, in the long run, achieving “internal circulation”. But the timing couldn’t be worse because the trend now among the public is to downgrade consumption to prepare for economic hardships.

As such, China’s latest directives look a bit contradictory to its other messages. On one hand, Chinese people have been told to contain their personal desires as the country prepares for all sorts of risks and challenges ahead. On the other hand, they are also told to spend as much as they can to help the national economy.

Clearly, people cannot do both. (Source:

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