China’s middle class holds key to recovery
Many still tightening their purse strings despite gov’t drive to boost consumption
First they came for Zibo’s barbecues. Then they returned in droves for the stunning ice sculptures of Harbin. After that, numbing noodles put Tianshui’s hotpot on their radar and palates.
Now Chinese tourists are flocking to Chengdu to catch a glimpse of cherry blossoms and rapeseed flowers in full bloom.
And like those majestic displays of pink and yellow, the resumption of domestic tourism has been a sight to behold over the past year, particularly for those looking to secure an enduring source of economic windfalls in uncertain times that have been punctuated by stubbornly low consumption.
Indeed, the spending outlook for China’s 500-million-strong middle class remains a bit murky, even as local governments across the country roll out innovative and eye-catching initiatives to boost spending.
How much those efforts have been paying off remains to be seen, but some insight should come from China’s release of its quarterly gross domestic product (GDP) this month. And data on retail sales and property investment may offer additional clues into whether consumer confidence has shown signs of recovery.
Since last year, Beijing has stepped up measures to boost spending in the automobile, real estate and tourism industries as leadership tries to fuel an economy that has sputtered since the pandemic.
While China’s middle-class population counts education and tourism as key areas in which they would be willing to spend, job prospects have remained shrouded in uncertainty for many Chinese people.
What’s more, the prolonged housing-sector downturn is forcing some homeowners to tighten their purse strings. This includes Thomas Ma, a 41-year-old man who recently lost his job in Guangdong. He took his redundancy severance and used it to pay off debt, including his housing, consumer and car loans.
Ma is now keen on selling one of his three properties, a small condo that is currently valued at 500,000 yuan ($69,000) — far less than the 800,000 yuan peak it reached a couple of years ago.
Ma still intends to spend on his children’s education but is looking to cut back on daily expenses and restrict any family excursions to Guangdong or nearby regions.
“Tutoring fees for children are horribly high in big cities — up to 1,000 yuan ($138) a class,” Ma said. “A month’s expenses could cost 4,000 yuan for a middle school student. The scary part is that I have two sons.”
Shrinking wealth
The findings from an extensive poll of China’s middle-class members in the 25-45 age bracket, released by finance and economic writer Wu Xiaobo, indicated that a large portion of the group saw their overall wealth shrink last year, leading them to be more cautious and conservative in their spending and investment.
More than 43 percent saw their wealth decline in 2023, compared with 31 percent a year prior and 8 per cent in 2021, according to Wu’s annual “White Paper on the New Middle Class,” It was based on polls conducted from June to November and involved urban residents whose families earned at least 200,000 yuan ($27,600) a year and owned at least one piece of property and a vehicle.
Job insecurity also loomed large among these middle-class families. A total of 43.4 percent of respondents said there had been lay-offs at their companies last year. It was unclear how many interviews were conducted last year, but Wu’s latest report said 500,000 people had been polled in the past six years.
Many analysts have said that a general lack of confidence in property and financial markets is the main reason Chinese consumers have been more reluctant to pull out their wallets.
One bright spot in consumption has been sales of electric vehicles (EVs) in China, but even that sector has found itself engulfed in controversy.
Buoyed by huge investments in technology and manufacturing, and benefiting from subsidies and supportive government policies, EV production has grown so rapidly that it has sparked home-grown concerns and accusations from abroad about the potential fallout from supply overflows.
Beijing has also issued warnings about the risks of overcapacity in some sectors and the potential drag it could have on the nation’s economic recovery, as leadership highlighted during a key economic conference in December.
In March, China’s leading EV manufacturers reported a strong rebound in deliveries after a slow start to the year, but an ongoing price war and the anticipation of favorable measures by the Chinese government to boost car sales have put a big question mark over the industry.
Uneasy transition in Chinese economy
Whether an uptick in consumption comes from tourism or electric cars, China’s goal to rely more on consumers to power the nation’s economy is unlikely to be an easy transition, according to analysts.
“The key risks for China are weaknesses in property and consumption. They will lead to lower overall growth,” Louis Kuijs, chief economist for the Asia-Pacific region at Standard & Poor’s, said in a research report late last month. “Moreover, policymakers have a tendency to respond to strains on growth by stimulating investment, including in manufacturing.
“This, then, further increases overcapacity in several goods markets and squeezes prices and margins.”
Meanwhile, tourism is not always a reliable engine that will persevere and sustain local economies indefinitely.
Yan Xu, deputy director of the Zibo Culture and Tourism Bureau — in that city with the barbecue-loving crowds — has publicly acknowledged that the surge in tourists might not be a permanent fixture for the small industrial region of Shandong province.
Despite viral videos on social media igniting interest and drumming up interest, lacking a 5A designation — the highest rating a tourism site can attain in China — is holding back Zibo’s growth, Yan was quoted as saying by Hongxing News, affiliated with the Chengdu Media Group, in January.
“The ultimate goal is to improve the entire city’s infrastructure and improve all tourism resources. In this way, not only can tourists enjoy a better experience, but the living standards of local people in Zibo can also be improved,” Yan said.
However, even regions that have top-tier tourist attractions are not always able to turn them into big revenue drivers, according to analysts at CSCI Pengyuan, a Chinese rating agency. Many such sites must rely on government subsidies, the team said in a November note.
Li Xunlei, chief economist at Zhongtai Securities, said that high saving rates, coupled with a relatively low proportion of disposable income to GDP — a contributor to high household debt — are primary reasons that consumption remains weak in China.
Li estimated that consumption made up just 54.7 percent of China’s GDP in 2023, lower than the 70-80 percent seen in most developed and developing economies. And this, he said, is a product of China’s longheld investment-driven growth model.
Another product of that model has been the outsized reliance on lowend manufacturing, resulting in an inexpensive expansion based on lowcost labour, Li noted.
“Even electric vehicles, lithium batteries and photovoltaic industries that currently offer great advantages are not high-end industries, and some core technologies have not been mastered,” Li said.
“Don’t pin your hopes on consumption growth in 2024. After all, consumption depends on residents’ income and the debt-service ratio, and these two indicators are not good,” Li said, adding that it was time for China to place the same level of emphasis on household spending to boost growth as it does on state investments.
“I believe that this is a great opportunity to increase residents’ income and narrow the income gap through the reforms of the fiscal and taxation system.”