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Cautiously stimulate consumption
Mr Xu said that since 2021, the Chinese government has launched a series of policies aimed at redistributing income and wealth, often under the banner of “common prosperity”.
That has hit high-paying industries such as tutoring, finance and technology.
“While these measures were intended to address income inequality, their consequences have been more negative than positive, and the economy has suffered a considerable blow.”
However, the government’s approach seems to be changing. Xu observed that in recent years, the policy The Third Plenary Session of the 18th CPC Central Committee This may mean promoting urbanization and encouraging migrant workers to settle in cities, get permanent jobs, and even buy homes.
The idea is to boost income growth for low-income groups, rather than focusing solely on suppressing the incomes of the rich. Mr Xu added that while this approach is promising, it is unlikely to be effective immediately and could take five to ten years to achieve – if it succeeds at all.
Mr Yu noted that “the government is very clear that they do want to promote domestic consumption, but the current situation is not ideal for them”.
“They want to truly deepen reforms and complete a series of tasks that will improve the quality of China’s economy rather than just the quantity.”
Amid these policy shifts, Chinese households, especially in large cities, have shown a marked caution in spending. One of the main reasons is the rapid decline in housing prices in these urban centers.
Mr Xu of the Economist Intelligence Unit said the previously resilient property market began to decline in mid-2023, following the lead of smaller cities that saw house price falls in 2021 and 2022. The decline triggered a negative wealth effect, with personal spending influenced not only by income but also by perceived wealth.
The cautious mood has also been exacerbated by a crackdown on high-paying jobs in China’s big cities. Investment banking salaries, for example, have plunged to half their previous levels, leading to a drop in consumer spending. This trend is further evidenced by a 7% drop in personal income tax revenues this year.
“If you see a big drop in personal income taxes, then that should mean that all the income from things like good jobs has probably been cut back a lot. So that might explain why consumption has become more cautious.”
Kantar Worldpanel’s Yu believes there are many “big motivations” behind the push for consumption, although it will take some time for these “grand strategies to be translated into tangible policies”.
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