Following the conclusion of the CEWC, which was coupled by a further round of disappointing economic indicators, it might be high time to revise perspectives on the Chinese economy.

The CEWC emphasized the key problem of lagging consumption and excess domestic supply. Lagging consumption seems to take the primary spot of importance by the politburo and was further reflected in much weaker-than-expected economic showings by subsequent publications of economic indicators. This seems to be a directional shift from previous analyses here, which emphasized the greater need to address supply-side issues even if consumer demand was not ideal.

This alignment of economic priorities can be gleaned from the order in which the official report listed key tasks/affairs that the meeting discussed. The first was about the need to increase consumer confidence, which is unprecedented in history. It would be targeted, especially towards the lower-middle income class and retirees, in the form of subsidies or pensions. There was also a need to increase service-based consumption, as well as consumption of cutting-edge goods/services that contribute to the CCP’s medium-term objective of sector-wide technology transformation. Three new terminologies were coined to emphasize the key economic areas in which the government would (积极发展) actively invest: first release economy (首发经济)、economy related to winter activities (冰雪经济) in preparation for the upcoming 2025 Asian Winter Games, and the silver economy (银发经济). These measures would be underpinned by the raising of government deficit and ensuring greater counter-cyclical fiscal measures to boost the economy.

We can conclude several insights from this short report. Firstly, the government is still actively seeking to balance between meeting its mid-to-long term objective of achieving an economy with “new productive forces” and the short-term objective of reversing the economic slowdown. [1] There is a strong desire to “kill two birds with one stone” by stimulating consumption in areas that the government has heavily encouraged high investment in, which was the traditional narrative that the CCP championed. It seems that even though consumption has become a much more important issue, the government is unwilling to concede fully and devote all its economic resources to addressing it.

Secondly, there is an emphasis on stimulating consumption for two segments of the population: lower-middle income and retirees. This does not cohere with the current pain points with the Chinese economy, which are manifest in low consumer sentiment amongst the working-age population. McKinsey reports that Millennials (26-41 y/o) in first and second-tier cities had some of the lowest consumer sentiment despite having the highest consumption ratio (21.8%) amongst all consumer segments.[2]

Fig 1. Consumer confidence segmented according to age, income bracket, and location. Source: Zipser, D., Hui, D., Shi, J., & Chen, C. (2024, July). 2024中国消费趋势调研: 探寻中国消费增长点 [2024 China Consumer Trends Survey: Getting Granular – In Search of Pockets of Growth in China]. McKinsey & Company.

This was corroborated by a report by SDIC securities, which demonstrated the pre-post COVID change in the correlation between the working-age makeup of major urban centers and their corresponding growth rates in consumption. There was no statistically significant correlation between the two before the pandemic, but data collected from January to May 2024 showed that provincial capitals that had a greater concentration of retirees experienced faster economic growth than those who had less.

Fig 2.1. Provincial Correlation to consumption before the Pandemic. Source: SDIC Securities

Fig 2.1. Provincial Correlation to consumption after the Pandemic. Source: SDIC Securities

Surveys on consumption patterns amongst 18–35-year-olds also indicate the overarching trend of “rational consumption” (智性脑), which consists of careful and meticulous consideration during consumption to get the biggest bang out of your buck.[3] This is complemented by an overwhelming tendency (>40%) of young consumers to naturally prefer low-cost goods and services during consumption. Evidently, the problem with consumption lies within the working-age population, which is concurrently the most consequential tranche in terms of consumption. Conversely, retirees and those close to retirement seem to have the most upbeat outlook on the economy, excluding those who live in villages or towns.[4]

Lastly, the manner in which the government addressed consumption issues seems to stem from a short-term perspective. The ageing population of China is now a reality, and there is a greater need to capitalize on this growing consumer base.[5] At the same time, the upcoming Asian Winter Games that will be hosted in Harbin on the 7 to 14 February 2025 gave rise to the newly coined term: economy related to winter activities (冰雪经济).[6] However, consecutive months of low CPI and the weak showing of November’s retail sales indicate the structural nature of lagging consumption. The primary driver has been the decline in property prices, which has significantly impacted household wealth, particularly among the growing middle class in major tier 1 and tier 2 cities—representing the country's most influential consumer base.

Despite such emphasis on reviving consumption, there seems to be a conspicuous lack of specific policies. While the government did say that they will increase budget deficits and engage in more “active” counter-cyclical fiscal measures, there was equal weight put on the issuance of Ultra-Long-Term Special Treasury Bonds (超长期特别国债) and Special Purpose Bonds (专项债). These financial instruments would be devolved to local governments, which would utilize them to either fund infrastructure projects, facilitate innovation, or urban development. While these tools do count as government expenditures, they seem to address the supply-side rather than demand. It does seem rather incoherent to lump them under the umbrella term of boosting domestic demand, even if a very tenuous link can be made between the amelioration of housing supply, which will indirectly increase consumer sentiment by way of asset appreciation.

Additional emphasis on a “moderately-loose” monetary policy also points to better lending conditions, but that, once again, does not directly impact the end consumer. M2 money supply has been increasing, but new Yuan loans have been sluggish, indicating tepid demand for debt financing due to weak consumer sentiment despite an ever-increasing supply of money. Chinese indices jumped following this announcement, which was the first since 2008, but it remains to be seen if such euphoria is indeed justified by greater economic activity, given that the fundamental issue of weak consumer demand has still not been fully addressed. Stock prices might be momentarily buoyed by greater lending conditions, but share buybacks and dividends must ultimately be rooted in revenue performance, which is directly influenced by consumer sentiment.

While the key term “supply-side structural reform” was patently absent in this year’s CEWC report, the first since it was coined in 2015, that does not indicate that less attention has been accorded to supply-side issues. [7] This second priority of this year’s report focused on the medium-term objective of achieving higher quality productive growth by means of economy-wide technological transformation. Specificities included heavy investment in artificial intelligence and strategic sectors in which China has a competitive edge, which likely encompasses EVs, green energy, and green infrastructure. This is essentially the “supply-side structural reform” that was mentioned in previous reports. More interestingly, an additional term to reduce “toxic business competition” （内卷式竞争）made its first appearance. Falling services PMI and cratering industrial profits are main culprits for an increasingly difficult supply-side environment, which has depressed company profits and valuations. Therefore, there is no “right priority” for the CCP. Consumer confidence has become the growing issue at hand, but that does not overshadow the equally important problem of supply glut. Additionally, it seems that the politburo’s proposed policies are more effective at addressing the former rather than the latter issue.

This is not to say that there have been no concerted efforts to address lagging consumption despite all the preliminary promises. Trade-in programs to encourage citizens to upgrade their kitchen appliances, cars, and electronics by giving them cash rebates for new purchases were implemented as early as March.[8] This fell under the coverage of Ultra-Long-Term Special Treasury Bonds, of which half (150 billion Yuan) was meant for consumer durables. Yet, there has been no follow-ups since. Additional measures such as electronic-shopping coupons have been localized, short-in-duration, and meager in volume at best: a 500 million Yuan holiday package (乐.上海) was introduced in Shanghai in September, while another 400 million Yuan package was introduced in Sichuan province, of which 300 million went to the renovation of home appliances and consumer durables.[9] [10] These efforts clearly fall short of the ambitious promises made by the government to stimulate consumption, lacking both the scale and coherence needed to achieve meaningful impact.

This does not seem to be priced in by the market, which remains extremely ebullient. The modest drops (The Hang Seng index jumped by 2.8% before slipping 0.5%, while MSCI China just went up by 0.05%) do not seem to capture the inherent contradictions that underlie the report.[11] Supply-side policies still dominate the picture, and there are two equally difficult tasks, one gaining increasing importance than the other, that China must handle. The lack of transparency in stimulating consumer demand combined with a seeming lack of incomprehension of demand-side issues are major risks that could affect future growth. Supply-side issues have always been significant, and the report seems to put sufficient weight on possible policies, but that is only half of the equation. Previous reports have always emphasized the importance of supply-driven growth, as increased capacity would stimulate greater domestic consumption; this must change now.[12]

References

[1] IDCPC. (2024, May 15). Central Committee Party Document Archive.

[2] McKinsey & Company (Seong, J., White, O., Birshan, M., Woetzel, J., Lamanna, C., Condon, J., & Devesa, T.). (2024). 2024中国消费趋势调研 [2024 China Consumer Trends Survey] [PDF].

[3] BKEconomy. (2024, February 12). Analysis on China’s Economic Outlook.

[4] Ibid.

[5] tatista. (n.d.). Aging Population in China.

[6] The State Council of the People’s Republic of China. (2024, November 11). Policies for Economic Stabilization.

[7] CEWC Archive. (2015–2024). Past Year CEWC Documents.

[8] The State Council of the People’s Republic of China. (2024, April 20). Comprehensive Analysis on Economic Strategy.

[9] Government News. (2024, September 26). Key Announcements from the State Council.

[10] Shanghai Municipal Government. (2024, September 26). Shanghai Policy Updates.

[11] Barron’s. (2024, September 26). China Economy Stimulus Policy.

[12] The State Council of the People’s Republic of China. (2021, December 10). Economic Planning and Fiscal Projections

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