China's New Chapter
Consumption Growth Warning Sign Flashes in China

Beijing adopted its new Five-Year Plan with hopes of escaping the middle income trap but just six months in, not everything is going as planned. Bloomberg reports:

Chinese consumers, whose spending helped underpin the first-half expansion this year, may not be able to deliver a repeat performance in the second as income growth slows. Household income growth slumped to 6.5 percent in the first six months from 7.6 percent a year earlier, data released Friday showed.

Headwinds on consumer spending may increase as officials signal they will step in to curb pay gains to keep manufacturing competitive with rival nations that have cheaper production costs.

A pillar of China’s economic transition plan has been to boost domestic consumption to the point where it can perform the heavy lifting previously conducted by export manufacturing and capital investments. In the past, when ups and downs have rocked confidence in consumption, Beijing has intervened to ensure that consumption growth stays strong and steady. But as the economy has lost its balance, such interventions are no longer getting the job done.

Sometimes, Beijing’s efforts to keep manufacturing competitive and support consumption have been working at cross purposes to each other. If Beijing keeps manufacturing wages low, Chinese consumers will have less money to spend. Beijing thinks it can strike a careful balance, but it’s hard to imagine how this doesn’t cut both ways. We will have to wait and see whether the wage controls will actually result in what Beijing calls “appropriate pacing”.

The tapering off of consumption growth reflects an inconvenient truth about China’s exit strategy. A consumer growth rate that is now expected to dip below overall GDP growth does not give much credence to the narrative that consumption can pull the rest of the economy behind it. Observing the impact of receding state stimulus and manufacturing wage controls, it seems likely that consumption growth has been a consequence of good manufacturing wages. In other words, the Chinese middle class consumer is still a product of the industrial economy. We’ve been warning for some time now that the light at the end of the tunnel has looked fainter by the day; increasingly, it’s not clear that China is even headed back aboveground.

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