The IMF write with authority on China as their analysts have good access to the planners. A recent ‘Working Paper’ from Yizhi Xu, Fan Zhang, Rongyu Cui, and Ding Hua takes a look at the current top-of-mind problem in China i.e. personal consumption. Or lack thereof.
First, a quick reminder of an important aspect of the problem.
I think this issue is well understood by anybody reading this so let me cut to the chase.
The IMF team identify three major issues that, if addressed, would be a sure sharp stick to prod those reluctant consumers along. Viz.
- Social spending needs to rise and the biggest bang-for-the-buck can be achieved by directing this to rural areas (where people feel the most vulnerable).
- The paper shows the clear difference between migrant and urban Hukou household savings rates in the big cities. Migrants, as one would expect, save more. Efforts to provide more equitable access to services for ALL residents in big cities would persuade the thrifty newcomers to be perhaps less so than now.
- The research notes the now near 5-year long housing market price correction is a contributory factor to higher savings due to the lower wealth effect. However, they’re less clear about what to do here suggesting only “.., measures to facilitate a more efficient and less costly transition in the real estate sector can also help boost consumption and reduce household savings.” Er, sure.
The paper necessarily tiptoes around the elephant-in-the-room which in my opinion is the absence of trust in government prevalent in China today. Who, after all, is ultimately responsible for the housing crisis? Who was responsible for the flubbed back-end COVID response and who could reform, at a stroke, the Hukou system, but isn’t doing so?
China’s leaders, I’m sure, know what needs to be done on the ‘consumption issue’. Why it’s taking them so long to get around to it though is baffling.
I’m reminded here of lines from the poem The Pied Piper of Hamelin by Robert Browning. Faced with a pressing problem, rats in their case, the people of Hamelin address their burghers as follows “Rouse up, Sirs! Give your brains a racking, To find the remedy we’re lacking, Or, sure as fate, we’ll send you packing!” I don’t think anybody’s sending anyone packing in China soon, but you get the point.
You can read the paper in full via the following link Reforms to Reduce China’s High Household Savings.
Happy Sunday.