Will ‘Revenge Spending’ Save China’s Economy?

Even an impressive consumer spending surge cannot overcome China’s other economic problems

A person reads a riddle hung from a lantern on display at a shopping mall in Beijing on Feb. 4, 2023. Jade Gao/AFP via Getty Images

Commentary

Much economic news coming out of China references “revenge spending.” It is a strange use of language. Nowhere in its use does anyone indicate who is getting revenge or on whom.

It seems to have emerged from the expectation that heavy consumer spending now that the economy has reopened—spending with a “vengeance”—will overcome other problems in China’s economy and propel rapid overall growth rates in 2023. That certainly is Beijing’s hope. Quite aside from strained semantics, some help from a spending surge seems likely. But otherwise, China’s economy faces growth impediments that will not lift so easily.

Chinese households have certainly amassed the means to spend freely. During the past year of zero-COVID lockdowns and quarantines, they have added some 17.8 trillion yuan to their savings, the equivalent of $2.6 trillion or nearly $900 billion more than they otherwise had past patterns prevailed.

With bank balances up some 80 percent above levels of 2021, there is clearly ample fuel for a spending surge. Many more optimistic forecasters expect this extra money to propel consumer spending up smartly this year, 9.5 percent, according to a recent analysis by PNB Paribas, allowing China to turn in 5 percent overall real growth according to its analysis.

Early reports show quite a pickup by Chinese consumers. Travel surged for the January Lunar New Year celebrations. Some 300 million travelers spent the equivalent of $56 billion in just seven days. Hotel bookings soared tenfold. Restaurants, according to the China Cuisine Association, were overwhelmed with traffic, and management reported that crowds were so large that their establishments were severely understaffed. Box office receipts rose by the equivalent of some $1.5 billion, the best January on record. The services purchasing managers index (PMI) tracked by the data firm Caixin/S&P Global rose in January for the first time in five months.

Even so, signs of restraint were evident. The surge in travel spending totals 30 percent above year-ago levels. That is impressive, but it was far short of the 80 percent surge in available funds. It is also telling that apart from travel and entertainment, most of the general consumer spending surge concentrated on “luxury goods,” suggesting that the distribution of extra savings is perhaps too narrow to carry the whole economy on a sustained basis. At the low end of the income distribution, savings levels only increased some 5 percent.

Most telling is the ongoing economic drag imposed by the still-troubled real estate sector. Once as much as 30 percent of China’s economy, residential development is mired in debt and shows no signs of recovering. Property sales declined 32 percent in January and are running 40 percent below 2022 levels. As of last December, the most recent period for which data are available, home prices have declined for 16 straight months. Since real estate is some 70 percent of Chinese household wealth, these still-negative facts raise significant questions about the sustainability of any “revenge spending.”

What spending there is seems to have focused on immediate satisfaction, and little of its shows a willingness by Chinese households to commit over the longer term. Spending on big-ticket items has shown much less of a lift. For all the records set in travel, hotels, and entertainment, outlays for autos, for example, remained in mid-January some 21 percent below year-ago levels.

Taking the picture as a whole, there is reason to expect the Chinese consumer to help lift the overall economy in 2023, but at the same time, it would be a mistake to go too far with the “revenge spending” theme. The mix of spending suggests that Chinese households are still wary of the future and barring some miracle solution to the nation’s real estate problems. That fact will become increasingly evident over time as the initial enthusiasm over the economic reopening runs its course.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.