Strong trust in Chinese consumers

Teaser: The next Chinese five-year plan will most likely include the so-called "dual circulation" plan, where higher private consumption is a key element, which will attract interest.

One can quickly be led to believe that the Covid-19 crisis generates completely new strategies among many governments, but I maintain my view that the Covid-19 pandemic rather accelerates developments that were already underway before the pandemic began. I have long argued that China will become the world's largest single market. This development is likely to be intensified with its new upcoming five-year plan, which will be presented internally at the Communist Party congress the 26th to 29th October and presented to the public in the new year.

The plan will perhaps challenge the consideration among non-Chinese investors and companies whether to be in the Chinese market or not, as it is quite demanding to take part in. Very curiously, there have been several Chinese exporters who, during the global Covid-19 crisis, have tried their luck in the domestic Chinese market instead. Some of them experienced that it has been difficult for them to establish a market position and break through, among other things, due to competition. It is quite saying about the Chinese market in general, but despite this challenge, the most likely scenario is that the domestic economy is now getting pushed towards higher growth rates.

Since May, there have been discussions in China and in the international press about what is referred to as "dual circulation", and it’s very likely to play a key role in the coming five-year plan, effective from 2021 to 2025. The main target is to encourage Chinese households to consume more, thereby getting the domestic growth engine to run at a higher speed. A positive signal by this way of thinking is the focus on healthy growth via pushing the domestic consumer demand forward, thus, a lesser extent relies on public investments in infrastructure.

Though the idea about having households consume more contains a straightforward challenge, which is simply to get consumers to increase consumption, as otherwise, logically, nothing will happen. In this context, one can interpret the two graphics in several ways, but it is obvious that the monthly change in retail sales must get back on track. It is improving at a pace which is in line with the expectations among a majority of economists. One of the many challenges is that the growth rate for retail sales needs to return to a level that is higher than before the Covid-19 crisis, which I do not expect to happen automatically within the next few years. In other words, a form of stimulus is needed for the wish in the fine-year plan to come true.

Graphic two clearly shows that by international comparison, Chinese consumers could spend more, which is positive, but the figure also reflects a greater need to save up. Not all Chinese have equal access to social welfare and/or access to health care, which is why many households save money for retirement or a hospital stay. If the government wants to compensate for the restraint in consumption, then there are groups in the population who must feel a boost in the social welfare and health care.

In my opinion, this is a path that the current political leadership would like to follow, but it may take ten years before the real positive consumer demand effect materializes. Conversely, consumers have previously reacted positively to income tax cuts, which I expect remains to be the case, and the effect will be relatively rapid.

These kinds of macroeconomic pleasures have a price, and surely, China still has the fiscal manoeuvre room to do so, but decades of growth also left a large environmental bill to be paid. It all adds up, which means that everything is not as fiscally straightforward as it used to be. I would be disappointed if the “dual circulation” plan is not backed by some form of economic stimulus to the households, which also should please the stock market for a few days.

However, this outlook does not seem terribly exciting and does not give the great reform feeling, which leads to the question on what more can be done? The economic stimulus towards households can be tuned up and down by any government in the world, including the Chinese government, but I estimate that the biggest effect will come from letting time do the work. If one remembers a few decades back, the same challenge with the German household savings was endless. It was even to great frustration of many European politicians, but no one really found the key to change the saving behaviour and thus increase the consumption.

I have often recognised something of the same pattern among the Chinese households, but what happened in Germany, because the Germans have now reached an "international level" in private consumption? In my opinion, it is quite simple, time passed, and a new generation of consumers emerged, who simply consume more. I expect the same development to happen in China and during the next ten years it could become quite a powerful force for two reasons. The world's second largest economy continues to grow above average and in addition, private consumption will account for a larger share of the economy. This domestic growth engine has been exhausted in other countries, but it is still waiting ahead in China. I argue that this is an attractive option and the development would have come in any case, however, the development can certainly be accelerated by the expected special focus in the coming five-year plan.

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