Photographer: Qilai Shen/Bloomberg

China's Resilient Shoppers Face Fresh Test From Market Headwinds

  • Consumption shrugged off mid-2015 stock rout. Can it again?
  • New Consumption in next decade to top previous 25 years

China’s consumers, having shrugged off stock market turmoil last year, face fresh headwinds as shares sink anew, the yuan weakens and the economy grinds lower.

The willingness of shoppers to keep opening their wallets through the market’s ups and downs -- as they did in 2015 -- will be key to whether the world’s second-largest economy avoids the kind of hard-landing scenario keeping global markets on edge.

Supporting China’s consumption story: it’s a too-big-to-fail pillar in President Xi Jinping’s remodeling of the economy away from over-reliance on exports and investment, prompting policies to boost spending. With the market hiccup set to drag on the financial sector’s contribution to growth and traditional industries flagging, the importance of China’s famously frugal consumers to the nation’s growth outlook is on the rise.

"The bottom line is that it can shake off this episode," said Andrew Polk, an economist with the Conference Board in Beijing. "In an era of economic volatility, it’s likely that with an already high savings rate China’s consumers are going to be relatively more even keeled than other parts of the economy because they have that large cushion."

Their importance is already on the rise: The contribution of total consumer spending to gross domestic product rose to 58.4 percent in the first three quarters of last year, up from 50.2 percent in 2014, according to IHS Global Insight.

China is poised to add 27 trillion yuan ($4.1 trillion) in new consumption over the next decade, exceeding the 23 trillion yuan added in the previous 25 years, even as economic growth averages only 4 percent annually, said Polk.

Stocks Slump

The Shanghai Composite Index has declined 15 percent so far this year. It slumped 7.3 percent in June, 14 percent in July, 12 percent in August and another 4.8 percent in September, yet retail sales growth actually quickened in the second half of last year.

One reason for optimism consumption will again shrug off the stock market’s early 2016 slide is the room for policy action to boost spending. High import tariffs on foreign goods, a value added tax, and capped rates on savings deposit all have repressed consumption, while rudimentary pension and health care coverage force precautionary savings for old age. Policy action on such fronts is changing that.

Lagging Consumption

Even after rapid expansion in the past decade, average Chinese household consumption is still lower than in Thailand and Malaysia and far behind South Korea, according to Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA in Hong Kong.

"This is due to financial repression through a capped deposit rate, high value-added tax and import tariffs for consumer goods," she said in a December report. "These variables have now changed."

Tax cuts, deregulation of service sectors, price reforms in utilities, the streamlining of administrative approvals for business and increased coverage and spending on the social safety net will all help boost consumption growth, said Wang Tao, chief China economist at UBS Group AG in Hong Kong. Relaxation of the one-child policy and loosening the household registration system that limits worker movement and the social benefits they receive will provide further boosts, she says. 

China also has lowered sales tax on small cars, which may spur faster growth in retail sales, according to a report by Bloomberg Intelligence.

Millennial Spending

China’s millennial consumers, ranging from age 15 to 35, are another source of potential, their consumption habits far removed from that of their more frugal parents and grandparents.

“The real balance between spending and saving will be shaped by China’s 414 million millennials,” said Stephen Roach, a senior fellow at Yale University and former Morgan Stanley non-executive chairman in Asia, in a Bloomberg television interview last month. “To the extent that they are going to be shaping the consumption, savings decisions in the next China, Watch out! Because again they are non-conforming, they are breaking the mold right now.”

With Xi vowing to step up efforts to rein in excess industrial capacity, the risk is that a prolonged stock market rout weighs on consumption. And unless policy makers can then find ways to prompt China’s shoppers to keep opening their wallets wider, Xi’s target of at least 6.5 percent annual average growth through 2020 may be jeopardized.

“Any significant slowdown in consumption growth would act as a further drag on the pace of Chinese GDP growth and could risk pushing China into a hard landing,” said Rajiv Biswas, Asia-Pacific chief economist at IHS in Singapore.

— With assistance by Kevin Hamlin

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