While the property crisis takes pride of place as China’s biggest economic problem, the uneasy state of Chinese consumers is more fundamental and perhaps more telling.
For years, even before the pandemic, Beijing talked about shifting the economy’s emphasis from large-scale infrastructure investing, property development, and exports to the consumer. The International Monetary Fund (IMF) offered the same recommendation. But the planners in Beijing never made the adjustment, no doubt because the old economic emphases produced impressive growth figures that made the country’s leadership look good.
Now, with the property crisis, exports in decline, and a general debt overhang among local Chinese governments, Beijing has become desperate to bring on consumers. However, Chinese households seem to have little interest in spending as freely as Beijing needs them to, in many ways because of past Beijing policies.
Every indicator says that Chinese consumers are not just reluctant to spend but that they are downright depressed. A survey conducted not too long ago by the People’s Bank of China (PBOC) documents this ugly feeling. An index that the bank’s statisticians have devised to weigh optimism on personal income growth against pessimism settled in this recent survey at a level of 49.7, down dramatically from 56 before the pandemic.
In gathering these figures, the bank discovered that as many as 15 percent of Chinese households have suffered a drop in income, and an even greater number expect that to happen to them. Regarding employment prospects, some 43 percent of respondents said they were insecure about their jobs. The index that weighed pessimism against optimism on property values was nearly 15 percent below pre-pandemic levels. A mere 15 percent of Chinese households expect property values to rise any time soon.
It is then little wonder that some 60 percent of Chinese households told the PBOC that they have prioritized saving over consumption, while barely 25 percent have prioritized the opposite. To be sure, Chinese people are culturally disposed to save, but these figures show a dramatic change from three to five years ago. The rise in bank deposits reflects this extreme mix of preferences. New deposits, already growing rapidly early last year, have accelerated into 2024, especially a willingness to lock up money in longer-term, better-paying deposits. The driver to save rather than spend is starkly evident in the fact that the Chinese paid down mortgages last year faster than they took them out, so the outstanding value of mortgages actually fell, which is historically a rare event.
These trends have continued uninterrupted even as the PBOC cut interest rates. Clearly, those moves were insufficient to change behavior, not the least because the deflation in China has outrun the rate cuts so that even falling nominal rates pay a higher return in buying power than previously.
The biggest contributor to the consumer funk by far is the property crisis. The collapse of major property developers has burdened financial markets with an overhang of questionable debt and accordingly reduced its ability to support the kind of business and job expansions that encourage consumer spending. Especially because millions of Chinese families had pre-purchased apartments from now-defunct property developers and will never see their homes completed, many Chinese have simply backed away from home purchases.
Construction activity has fallen steeply, and property values have declined. Since some 80 percent of Chinese households own their own home, that drop in property values has hit household net worth hard, at once creating an aversion to spending and a strong motivation to save.
Compounding the problem is how Chinese consumers borrowed in the boom years before the pandemic. Then, property values rose fast, encouraging mortgage borrowing and spending generally among those who already owned a home and felt rich as its value rose. Now, most of that debt remains, but its backing—the value of real estate—has declined.
If this were not enough to make Chinese consumers wary, there is also the legacy of the zero-COVID measures pursued by Beijing through the pandemic and right up to the end of 2022. The seemingly arbitrary closures, lockdowns, and quarantines imposed by these measures have convinced many middle- and low-income Chinese that their incomes are not as secure as they had previously thought and discouraged spending accordingly.
None of these effects are going away any time soon. The income insecurities left by the zero-COVID policy may lift relatively soon, but Beijing has only just begun to address the property crisis. It will take time and a lot more effort by the authorities to even begin to approach a solution, and it will take even longer for the legacy of these events and the debt overhang that they have created to begin to lift consumer sentiment. China has a long, tough road ahead, and for now, it must be trudged without much help from the Chinese consumer.
