China Details Plans to Stimulate Consumer Spending

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The Chinese government has announced a series of measures aimed at stimulating consumer spending in the country. These measures include subsidies for Chinese drivers who trade in their older cars for newer models, as well as subsidies for rural households that purchase insulation and other home renovation materials to improve energy efficiency. In addition, entrance fees at scenic sites will be reduced to promote tourism.

The urgency to boost the economy has increased as it has become clear that the recovery is stalling. Li Chunlin, vice chairman of the National Development and Reform Commission, acknowledged that consumers lack confidence and have concerns. Real estate prices have fallen, leaving many Chinese feeling poorer and less willing to spend. Furthermore, youth unemployment is high, causing both young people and their parents to be more cautious about spending. Wages have also stagnated after decades of rapid increases.

While economists agree that policies to encourage Chinese consumers to spend are necessary, they remain skeptical about the government’s plans. The development commission did not disclose how much national government spending would be allocated to support the measures, suggesting that the cost will likely fall to local budgets. This is concerning since many local governments in China are already facing financial difficulties and may struggle to provide the necessary funds for new consumption subsidies.

The measures announced on Monday were vaguely described. The government instructed local governments to increase financial support for auto consumption and encourage the trade-in of old cars, without specifying the extent of the support. Additionally, the government promised to make it easier for people to sell and register used cars, but this could lead to more people considering inexpensive used cars as alternatives to new ones, thus intensifying competition in the already struggling Chinese car industry.

Some of the policies announced on Monday are not new. For example, the national program to add elevators to older apartment buildings was already proposed by former Premier Li Keqiang in May 2020. Surveys of consumer confidence indicate that households’ willingness to spend has plummeted and has only begun to recover slightly this year. In response to the weak data, China’s National Bureau of Statistics halted the public release of monthly readings of consumer confidence after March.

China’s approach to stimulating consumer spending differs from that of the United States and other advanced economies, which involved sending checks to consumers. Instead, China’s policies provide incentives for the purchase of goods and services produced domestically. This aligns with China’s longstanding policy to support its industrial businesses and exports. Some economists argue that this approach of targeted subsidies may be more effective than direct cash assistance, as cash handouts may simply be saved rather than spent.

To add to the concerns, recent economic data shows that China’s manufacturing sector is expected to shrink for the fourth consecutive month in July. Growth in service sectors also slowed significantly, mainly due to weakness in the construction industry, which has been plagued by delays in the completion of new apartments over the past two years.

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