China may keep trying to spur consumption without big stimulus

BEIJING - China’s top leaders have signalled stronger stimulus to help fill a hole in consumer demand. That does not mean Beijing will roll out a “bazooka” package just yet, or abandon its factory focus.

Senior officials last week endorsed their strongest pro-growth stance in a decade, indicating bigger government spending and more interest rate cuts. Boosting consumption was elevated to the top priority for only the second time in a decade, even before data released on Dec 16 showed

retail spending unexpectedly slowing.

Economists and foreign governments have long wanted officials to rebalance China’s two-track economy, where exploding exports have put Beijing on course for a record trade surplus as domestic demand languishes.

But the recent steps hinted at will likely fall short of the kind of radical action analysts believe is required to stem a deflationary spiral and rescue the property market.

Alarmingly low bond rates indicate the gauntlet facing policymakers in reviving the confidence that is foundational for spending.

While officials vowed to sharply raise funding for a programme subsidising big-ticket consumer items on Dec 16, so far that push has had limited effect as consumers keep saving under a gloomy job market. 

The ruling Communist Party faces a “long, long battle” to reflate the economy, said Morgan Stanley’s chief China economist Robin Xing, adding that 2025 will “be the year of trying”.

“They will try a lot of things – see it’s not enough and keep trying,” Mr Xing told Bloomberg Television. “Maybe by 2026 finally they will find the right dose of policies – a combination of consumption-centric stimulus plus social safety net reform.”

The drive for domestic demand still does not represent a fundamental pivot from President Xi Jinping’s grand strategy for high-tech manufacturing to propel the world’s No. 2 economy.

Boosting Chinese consumers will shield the prized factory sector if a trade war with US President-elect Donald Trump cuts China’s access to international markets. 

Beijing’s next stimulus moves could come as soon as this week. The US Federal Reserve is expected to cut rates on Dec 18, creating easing room for China’s central bank. 

Modest approach

Beijing will reveal its specific economic road map for 2025 only at an annual legislative meeting in March, which sets the annual growth goal and fiscal deficit.

That means any expansion in government spending likely will not come in the next few months. 

A commentary in the Communist Party mouthpiece People’s Daily said economic goals play a strong guiding role.

“Maintaining a certain level of economic growth is crucial to resolving various contradictions and problems in development,” according to the article dated Dec 17. 

The overall increase in fiscal stimulus – including higher headline deficit and other government bonds not covered by that – could be equivalent to about 2 per cent of gross domestic product, according to forecasts by UBS Group and BNP Paribas. 

While that is an improvement for the traditionally cautious Ministry of Finance, the boost is modest globally.

The United States, for example, expanded its budget deficit by more than 13 per cent of its GDP in the span of one year in response to the initial Covid-19 pandemic. 

China’s broad fiscal expenditure increased by 1.4 per cent in the first 11 months of 2024 from a year ago, according to Bloomberg calculations of official data released on Dec 16.

That provided only a small boost to the economy and fell short of an increase of 8 per cent in broad expenditure planned in the annual budget in March.

Similarly, although forecasts of 40 to 60 basis points of interest rates cuts in 2025 mark a big step for the People’s Bank of China, they are dwarfed by the Fed’s 150-basis-point rate cut in response to Covid-19 – or its decision to push rates to near zero per cent from 4.5 per cent in the span of a year in 2008 to deal with the Global Financial Crisis.

The authorities should commit to hitting a 2 per cent inflation, and vow to keep cutting rates and raising public spending until that goal is reached, said researcher Liu Lei from state think-tank National Institution for Finance and Development in Beijing. “Then households will increase consumption as they’ll expect their future income to rise.” 

“The problem now is we don’t have such a target,” he said. “So any programme like the trade-in subsidies will only have a temporary impact because residents are overdrawing their future spending power.” 

While China’s Parliament sets a 3 per cent inflation goal, that is seen as more of a ceiling, with consumer price index readings hovering barely above zero for the past two years.

China has taken a conservative approach to stimulus since the pandemic, as leaders sacrificed some short-term growth to shift the economy from property to new drivers.

But those fresh sectors – from electric vehicles to advanced computer chips – have yet to grow big enough to compensate for the shrinking housing sector. 

“For a long time, policymakers had hoped that they could use industrial policy to support near-term economic growth. That just didn’t work,” said Mr Christopher Beddor, deputy China research director at Gavekal Dragonomics in Hong Kong. “So they’re now turning back to traditional fiscal and monetary tools.” 

Global competition

Policymakers are signalling the more stimulative posture is here to stay, while at the same time keeping longer-term industrial policy goals, according to Mr Beddor. 

That was evident at last week’s annual economic conference, which named “leading the development of ‘new productive forces’ with tech innovation” as the second priority after lifting domestic demand.

The slogan coined by President Xi promotes the use of industries with cutting-edge technologies and higher productivity to drive growth. 

The work conference also “pledged to coordinate supply and demand, deviating from the supply centric policy mode but not fully leaning towards a demand centric mode yet”, Citigroup economists said in a note. 

If the policy boost to consumption has only a modest effect, then investment will likely still be an important lever for Beijing to deliver growth.

Among investment, manufacturing has been growing at a much faster pace than infrastructure over the past year, while property continued to collapse.

“They’re going to continue to increase manufacturing capacity. I doubt that’s going to change, because manufacturing investment remains a major source of growth for China,” said Natixis chief Asia-Pacific economist Alicia Garcia Herrero. “Consumption cannot do it all of a sudden.” BLOOMBERG