In a bold move to rejuvenate China's slowing economy, the country's leaders are shifting gears from their traditional growth strategies. The focus is now on encouraging households to spend more, a departure from the past reliance on state investment, exports, and a booming property market. This new approach, unveiled at the Two Sessions in Beijing, aims to set an annual growth target of 4.5%–5%, the lowest since 1991.
One of the key strategies is to enhance social services and support for families. The government plans to expand services for the elderly, enforce paid annual leave, and provide more assistance to families with children. By doing so, they aim to boost household incomes and consumption, recognizing that a secure and supported population is more likely to spend.
However, the question remains: will these measures be enough to persuade households to open their wallets? China's leaders are certainly optimistic, as they continue to invest in advanced manufacturing and technology, aiming to integrate artificial intelligence across various sectors. But the global rise in protectionism and weakening demand for Chinese goods pose significant challenges to this strategy.
Premier Li Qiang acknowledges the difficulty of transitioning to new growth drivers, stating that "the imbalance between strong supply and weak demand is acute." This highlights the delicate balance China must strike to sustain its economic growth.
The weakness in spending is not just a result of cautious government policies but also a reflection of broader economic and social issues. Chinese households already spend a smaller portion of their income compared to other major economies, with household consumption accounting for only about 40% of GDP. Recent data suggests that government stimulus can encourage spending, but confidence remains fragile.
The prolonged downturn in the property market is a significant factor contributing to weak consumption. Real estate has historically been a major driver of economic activity in China, but the industry has been in crisis for several years due to a debt crackdown on developers. Falling home prices have eroded household wealth and confidence, impacting not only the construction and related industries but also incomes and consumer sentiment more broadly.
Beijing has implemented measures to stabilize the property sector, such as cutting mortgage rates and easing home-buying restrictions, but these efforts have not yet reversed the downturn. The challenge is further compounded by declining birth rates, high youth unemployment, and weak demand pushing the economy towards deflation.
As Gerard DiPippo from the RAND China Research Center observes, the shift towards consumption-led growth is stronger in narrative than in actual policy support, at least in the short to medium term. The current policy framework aims to stabilize the consumption share rather than actively increase it.
China's economic rise over the past four decades has been largely driven by construction and exports. The next phase of growth may require a different approach, one that focuses on building consumer confidence and empowering households to spend, raise families, and drive the consumer economy. It remains to be seen whether this new strategy will be successful in sustaining China's economic growth.
