Household spending key to strong growth

As China navigates a decline in the property market and rising global economic uncertainties, consumption is poised to assume an even more crucial role in driving the country's economic growth this year, analysts said.

Policymakers should direct efforts toward introducing consumption-boosting fiscal and monetary policies to better catalyze consumer spending, they said, stressing that boosting residents' income is the essential recipe for stimulating robust and long-term growth.

"China's consumption market saw a stable start to the year," said He Yongqian, a spokeswoman for the Ministry of Commerce, at a news conference earlier this month.

Key retail and catering enterprises monitored by the ministry reported a 4.1 percent year-on-year increase in sales during the eight-day Spring Festival holiday that ended on Feb 4, while online retail sales grew by 5.8 percent compared to the same period last year, He said.

"China's consumption market has demonstrated remarkable resilience, significant potential and vibrant dynamism, with the fundamental upward trend intact," He said.

As the government rolls out new policies and initiatives to further boost consumer spending, the overall consumption market is poised to continue its steady expansion in the first quarter, He added.

In particular, China's current consumption levels are relatively lower than the global average, presenting a significant opportunity for further growth, analysts said.

According to analyses conducted using World Bank data, the average consumption rate among 10 major economies, accounting for 63 percent of global GDP collectively, stood at 73.22 percent, when their per capita GDP fell within the range of $10,000 to $15,000, said Sheng Songcheng, professor at China Europe International Business School.

China's per capita GDP reached $13,000 in 2023, and its current consumption rate stands at only 55.6 percent, indicating the vast potential for China to further boost its domestic consumption and capitalize on this untapped source of economic growth, Sheng added.

In recent years, the pace of income growth for Chinese residents has slowed, while the leverage ratio of the household sector has continued to rise, both of which have dampened personal and household consumption willingness and capacity, Sheng said.

Luo Zhiheng, chief economist at Yuekai Securities, said rebalancing the distribution of national income in favor of households, especially those in the middle and lower-income brackets, is a critical step in unlocking the full potential of consumption as a driver of China's economic development.

Key measures include perfecting the tax system, increasing transfer payments and accelerating the market-oriented circulation of rural land, all aimed at raising the share of national income for residents, particularly middle and low-income groups, Luo said.

Governments at all levels should enhance fiscal and monetary support, which will be crucial in providing the necessary impetus for Chinese consumers to confidently engage in spending activities, thereby fueling the engine of economic expansion, Luo said.

China should scale up fiscal funding in pushing forward the consumer goods trade-in initiative, and hand out consumption vouchers targeted at middle and low-income households, Luo said, adding that banks should actively develop the consumer finance sector to better serve both high-end and big-ticket consumption needs.

Liu Chenjie, chief economist at fund manager Upright Asset, said reducing the mortgage interest rate should be a priority for policymakers as they seek to stimulate consumption-driven economic growth in China.

The mortgage burden, which can account for 25 to 30 percent of a household's total expenditure, limits the resources available for other consumption activities, Liu said.

The total outstanding mortgage loans in China have reached around 40 trillion yuan ($5.49 trillion), and with an average interest rate of around 3.3 percent, the annual interest payment alone amounts to 1.32 trillion yuan, Liu said.

"If the mortgage interest rate were to be further reduced by just 1 percentage point, it would save households around 400 billion yuan in annual expenditure, effectively unlocking their consumption potential," Liu said.