China How policy can support consumption-110280554

1Haibin Zhu (852) 2800-7039haibin.zhu@jpmorgan.comJPMorgan Chase Bank, N.A., Hong Kong BranchGrace Ng (852) 2800-7002grace.h.ng@jpmorgan.comJPMorgan Chase Bank, N.A., Hong Kong BranchTingting Ge (852) 2800-0143tingting.ge@jpmorgan.comJPMorgan Chase Bank, N.A., Hong Kong BranchJi Yan (852) 2800-7673ji.yan@jpmorgan.comJPMorgan Chase Bank, N.A., Hong Kong BranchAsia Pacific Economic Research11 September 2024J P M O R G A Nby the government) and cash transfer to households. In our view, the key missing components are measures to increase household income and lower the household saving rate. Low consumption in ChinaHousehold consumption as share of GDP is much lower in China than most other countries in the world. In 2023, house-hold consumption accounted for 39.2% of GDP in China, compared to 67.9% in the US, 53.0% in Japan, 49.3% in Ger-many, 60.3% in India and a 55% world average (Figure 2). Over time in China, household consumption fell from 47.0% in 2000 to 34.6% in 2010, then gradually recovered to the current level. 30405060700005101520ChinaUSGermanyJapanIndiaGlobal%Figure 2: Household consumption as % of GDPSource: CEIC, J.P. MorganA low share of consumption does not mean China’s consump-tion growth is weak. In the 2000-2010 decade when China’s household consumption as % of GDP continued to decline, average annual consumption growth (in real terms) was 9.6%, the strongest in the world. Back then, overall GDP growth was even stronger (10.4% on average). In 2011-2023, con-sumption increased at an average annual pace of 7.8% in Chi-na, while real GDP growth decelerated to 6.5% (Figure 3). Hence, the weakness of consumption is in relative terms. -50510150005101520%Figure 3: Household consumption growth in ChinaSource: NBS, J.P. MorganReal GDP growthReal consumption growthLow consumption in China is attributable to two reasons. First, the share of household income (as % of GDP) is low. While the flow-of-funds data suggest China’s household dis-posable income is about 60% of GDP, not much lower than •China’s consumption share is low, especially services consumption•Low consumption is due to weak disposable income and a high saving rate•Fiscal transfers are helpful, but have limited and tem-porary impact•In our view, policy needs to boost income growth, revive the services sector, and stabilize the housing market•Reducing inequality and improving social safety net-works can lower the saving rateChina is currently an exception to global trends in its growth and inflation dynamics, facing deflationary pressure after the post-pandemic reopening (link). Deflation pressure comes from multiple sources, including soft global commodity pric-es and domestic food price declines among others. But key among them is weak domestic demand, or more specifically the imbalance between domestic demand and supply. The recovery of consumption has lagged behind the recovery in production (Figure 1). The resulting deflation (or low CPI inflation) is pernicious for corpora