U.S. Treasury Secretary Janet Yellen has recently expressed her frustration over the low consumer spending and property crisis in China. She joins several independent economists in calling for more effective measures to address these issues, which are major hurdles in the Chinese economy.
Yellen stated, “Our view has been that raising consumer spending in China as a share of GDP is really important, along with measures to address problems in the property sector. So far, I would say, I haven’t really heard any policies on the Chinese side that address that.”
Her criticism is directed towards China’s focus on subsidizing large state-owned companies instead of working towards reviving the wider economy. This has led to disappointment among experts who suggest that China should stop using household money to subsidize manufacturing companies.
According to the World Bank, China’s GDP growth is predicted to be 4.8% this year, falling short of the country’s 5% goal. It is expected to further decline to 4.3% in 2025.
The low consumer demand in China not only affects the country’s economy but also has a significant impact on the global economy. This can have adverse effects on businesses in the U.S. and other parts of the world.
Lourdes Casanova, director at Cornell University’s Emerging Markets Institute, stated, “For U.S. companies like Apple, Nike, Microsoft, KFC, Starbucks, Coca-Cola, Tesla or General Motors, to name a few, China is a big market. Any increase or decrease in consumption in China can influence their bottom line.”
There are serious concerns about the U.S. and the European Union slipping into a recession, as noted by Francesco Sisci, an expert on China affairs and director of Appia Institute, an Italy-based think tank. He stated, “In China, there’s deflation and no sign of getting out of it. If China doesn’t get out of deflation, it could multiply recessionary forces worldwide. It might actually happen.”
One of the main reasons for the low consumer demand in China is the tendency to save rather than spend. Despite the recent measures taken by the Chinese government, analysts are not convinced of their effectiveness. These measures include lowering mortgage rates and cutting the reserve requirement ratios (RRR) to encourage banks to lend more money. However, experts believe that these measures may not be enough to revive the housing demand.
The Peterson Institute for International Economics (PIIE) stated in a commentary, “Housing demand is unlikely to see any meaningful revival just because of lower mortgage rates and down payment requirements, as experience shows.”
Casanova believes that low consumer demand is not an easy problem to solve as the average Chinese citizen tends to save more than spend. Personal consumption expenditures (PCE) as a percentage of GDP stands at 68% in the United States, 53% in Europe, and only 39% in China. This shows that there is room for improvement in China, but changing consumer habits takes time. She further explained, “Americans often keep their cars outside the garage because garages are full of household items, clothes, toys, garage tools, and other things.”
One way to increase consumer demand is to increase salaries and take additional social security measures. However, this could lead to increased production costs for companies and negatively impact exports, as mentioned by Sisci.
He stated, “What China needs is transformative reforms that would have a political price, and the ruling Communist Party is not eager to pay it.”
Contradicting the World Bank’s prediction, China’s Vice Minister of Finance Liao Min stated that the economy is responding positively to the government’s series of stimulus measures.
“These initiatives aim to leverage government spending to stimulate overall social investment and consumption, thereby increasing effective market demand,” Liao said.
In conclusion, it is evident that low consumer spending and the property crisis in China are major challenges that need to be addressed. The Chinese government needs to focus on implementing more effective measures to revive the economy and increase consumer demand. This will not only benefit China but also have a positive impact on the global economy. It is time for transformative reforms that will lead to sustainable growth and benefit both the Chinese people and the world.
