China's Consumer Demand: A Caged Growth Engine

Last year China failed to achieve its GDP growth target for the first time entering the new century. The authority explained that lower growth is beneficial for structural reform in the long run: consumption, along with emerging enterprises that creates consumer demand, should dominate China's economic growth to replace investment and net export in the next decade. Whatever such economic new normal is visioned to be, the January data cannot disguise the fact that China is on the edge of deflation. Besides another negative PPI for the 35th month and shrinking trade statistics, the January CPI is 0.8%, the lowest in the past five years. Considering the fall in oil price, this is still a dangerous figure indicating weak domestic demand, especially when fresh, usually against-season grocery and transportation tickets are much more expensive around the new year season. Another compelling phenomenon can be observed in most cities, where a considerable amount of small retail shops, department stores, middle-priced restaurants and online shopping logistics were either closed or their business hours were shortened half a month before the Spring Festival holiday starts. Last year, on the contrary, these business worked extra hours during the holiday season. The decline in consumer spending is now hard to be neglected. 

Source: Baidu

Why do consumption fall when the government is actually encouraging spending? Some blame on the anti-corruption initiative that damaged related business supported by public funds, which is an unwarranted excuse made up by those at stake, because the essence of the so-called growth and structural reform just lies in better government transparency and improved state enterprises efficiency. But why do commonplace households cut their spending, too? Stumbled economic growth plays a role in, yet what makes consumer demand even more vulnerable to recession is the extra cost of spending in China. Yes, there are "fifty shades" of the tax policy that abuses Chinese consumers that eventually makes their money flee away from domestic market.

For one, imported consumer goods are subject to an average of 15% custom tax, 17% value added tax and 30% consumption tax for recreational goods (cigar, liquor, cosmetics, and vehicles). A typical Chanel lipstick sold in Beijing charges 20% more than that sold in Manhattan (NY consumer tax included), and the same  bucket of milk powder charges around 30% more in China than in Australia. Since cheaper domestic substitutes are exposed to severe quality problems, the business of "online buyers" emerged. From luxury products to baby food, from Japanese electronic appliances to Laduree's Paris-limited snacks, there are always Chinese people living abroad to purchase these products and sell them online to Mainland China. They either physically bring goods back to China, or use shipping agencies for tax exemption. Even with arbitrage, the price domestic consumers pay is significantly more reasonable. When China's economy was in boom, some better-off people may directly buy domestically, and many of them use cash coupon of large face value (such coupon is now forbidden under the anti-corruption regulation) to make purchase. However, due to economic malperformance and policies suppressing property market growth, household wealth of the Chinese shrank, and they became more prudent to buy only at the lowest possible price. The three new engine for China's economic growth is given by officials as domestic consumption, infrastructure investment and foreign investment. At least for now, the first engine remains a fanciful blueprint rather than a pragmatic instrument unless there are tax cut for imported goods and severer quality supervision for domestic products. 

Another lifelong worry that prevents the Chinese from spending their savings is the lack of social and medical welfare. With no social safe net, spending today means potential life threat tomorrow. Even the richest group of people have these precautionary concerns, and they'd rather invest over 85% of their wealth in the real estate market for financial stability after retirement. Many young couples have to afford the medical and nursing expenses of four parents (usually from rural area, not eligible for free medical insurance) while raising their children. Therefore, the fiscal policy should create purchasing power for households on a life-quality-improving purpose. Most directly, the personal income tax should be collected on a family basis instead of individual by individual to account for average disposable income among family dependents. Tax exemption can also be practiced as an award for those who promoted social good, eg. micro-business entrepreneurs,  blood donators and (dependents of) organ donators, organic agriculture farmers, etc. With a distorted tax structure, the Chinese consumer demand is a caged tiger, niggardly fed by the zoo keeper, highly expected for outperformance in the market circus, and secretly spoiled by the exotic speculating audience. Should it be unchained and appropriately stimulated, this could have been a potent beast to combat deflation and a beauty to attract foreign business investment. 

This entry was posted on Monday 16 February 2015 and is filed under ,,,,,,,. You can follow any responses to this entry through the RSS 2.0. You can leave a response.

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