A diagnosis has emerged that Chinese consumption continues to rebound, supported by the government's strong policy will. However, the slowdown in household income, poor real estate performance, and concerns about deflation have been identified as constraints on the recovery of consumption.
The Bank of Korea, in its report titled 'Review of recent consumption conditions in China' released on the 29th, noted that 'the importance of consumption has increased as external risks have grown since the inauguration of the second term of the U.S. Trump administration, and the excess supply in the real estate market has reduced the capacity for investment growth.' It added, 'Despite some negative factors in the future, consumption is expected to continue its recovery, bolstered by the government's strong willingness to stimulate the economy.'
According to the report, China's retail sales expanded since the fourth quarter of last year but stalled somewhat in July of this year. However, the government's consumption stimulation policy, known as 'trade-in for new products' (以旧换新), is supporting the recovery. This policy provides subsidies for replacing old products such as home appliances, furniture, and automobiles with new ones, and is estimated to have raised the retail sales growth rate by about 1.4 percentage points in the first half of this year.
However, the Bank of Korea highlighted the following as key constraints on the recovery of consumption: the slowdown in household income growth, the real estate market recession, and expanding deflationary pressures.
China's household disposable income has maintained an increase of around 5% recently, but with the youth unemployment rate at a high level (17.8% as of July) and stagnant manufacturing employment, the potential for income growth is limited. Housing prices are also generally declining, with the prices of new homes in first-tier cities, which had rebounded last year, turning downward again in May.
In terms of prices, the core consumer price index (CPI) rose only 0.5% in the first half of this year, and the CPI has shown fluctuations around 0%, leading to growing concerns about deflation. Excess supply and intense price competition in industries such as steel, automobiles, and petrochemicals have created downward pressure on prices.
On the other hand, the government's efforts to strengthen the social safety net and expand service consumption were evaluated as positive factors. China's public transfer expenditures and per capita pension amounts in areas such as healthcare and unemployment benefits are lower than those of major countries, resulting in a significantly higher household net savings rate (35.7% in 2021) compared to the United States (4.5%) and Korea (8.0%). The Bank of Korea predicted that 'strengthening healthcare and pension guarantees will expand basic consumption capacity and contribute to the recovery.'
Although service consumption is still below the trend prior to the pandemic, it has been analyzed that there is a high likelihood of improvement in the future, as the Chinese government is reinforcing policies such as expanding paid leave and supporting cultural and leisure services.
The Bank of Korea noted that 'if the recovery of consumption stalls or if the export slump intensifies due to the U.S. government's tariff policy, the Chinese government may introduce additional stimulus measures such as increasing subsidies or cutting key policy rates,' adding that 'this could pose an upside risk to the Chinese economy.'