Lackluster consumer demand in China is emerging as another factor stalling the world's second-largest economy and is driven by a demographic trend that shows no sign of reversal, economists say.
The government has been trying to boost consumption by lowering the savings rate, but it has been unsuccessful because such an increase could only be achieved by raising household incomes and strengthening the social safety net, University of Wisconsin-Madison researcher Fuxian Yi wrote in an unpublished report he shared with Newsweek.
China's average savings rate between 2018 and 2022 was as high as 45 percent compared with 23 percent in the rest of the world, Yi told Newsweek—a challenge that has its roots in the demographic shift in a country of over 1.4 billion in which the proportion of those of working age to retirees is falling.
Retail sales of consumer goods, a key indicator of domestic demand, increased by just 2.3 percent in April, according to China's statistics bureau. This was 1.5 percentage points lower than economists forecast in a Reuters poll and the smallest increase since December 2022.
A 3.1 percent uptick was posted for March and 5.5 percent for the first two months of 2024. China combines January and February data to account for the long Lunar New Year holiday.
Retail sales had held steady at over 7 percent year-on-year growth before the arrival of COVID-19. Since the brief rebound seen in early 2023 after Beijing dropped its strict "zero Covid" measures, sales growth has failed to reach pre-pandemic heights save for the last three months of 2023.
Beijing has nonetheless taken an optimistic view.
"The consumer market was a relatively positive area in the economy during the first quarter," Sheng Laiyun, deputy director of China's statistics bureau, told reporters last month. "From the perspective of household consumption, the focus is mainly on purchasing processed consumer goods," he said.
The Chinese embassy in the U.S. did not immediately respond to requests for comment.
Economists say the weakening consumer spending growth is in part a result of China's one-child policy, which began in 1980 and was ended in 2015 as the country grappled with a falling birth rate.
For one, it led to a decline in the number of children and a lower dependency ratio—the proportion of dependents to working-age adults.
Growing elderly population
"Children and the elderly do not produce but consume. Comparisons across countries and within China over the years consistently show that the total dependency ratio is positively correlated with household consumption as a share of GDP," Yi said.
"Obviously, the only-child generation is also unable to support their parents in their old age," Yi said.
Those have not been the only demographic issues to affect consumption. The one-child policy and selective abortion of baby girls have resulted in about 35 million more men than women.
High bride prices and societal expectations, such as the groom owning a house, also weigh on the spending potential of families with boys. "There is even a popular saying in China that 'men's consumption power is not as strong as pet dogs,'" Yi said.
Another factor at play is the yearslong slump in China's real estate sector. Property accounts for more than two-thirds of household wealth in the country.
Youth unemployment is also dampening consumption.
China's statistics bureau stopped reporting this statistic for six months after the 21.3 percent unemployment rate for 16 to 24-year-olds posted last June. The reports resumed in December, but with a new calculation method that excluded the rural unemployed and those who had given up on the job hunt out of frustration.
Yi said that while household income has been growing, it has lagged behind GDP growth.
If Beijing did sufficiently increase household incomes, it could expand the middle class with the added benefit of soaking up excess industrial capacity with the increased domestic consumption, he said.
This could also boost trade relations with the U.S. by increasing American imports, which would serve to improve political ties, he said.
During their trips to China last month, U.S. Treasury Secretary Janet Yellen and German Chancellor Olaf Scholz faulted Chinese government support for industry for what they say is overcapacity. China denies this.
The Chinese government has been estimated by the Center for Strategic and International Studies think tank to spend more than twice as much on industrial subsidies as the U.S., which says this gives Chinese companies an unfair advantage.
Last week, U.S. President Joe Biden maintained Donald Trump-era tariffs on $300 billion worth of Chinese imports while hiking tariffs on new categories totaling $18 billion in value reflects the ongoing trade tensions. The European Union has launched anti-dumping investigations into what it views as a glut of Chinese goods.
"China needs to substantially increase domestic consumption, which means raising household disposable income as well as long-term assured investments in social spending, so that households, particularly of the lower to middle-income levels, can feel safe to spend," Steve Tsang, director of the SOAS China Institute of the University of London, told Newsweek.
If China's President Xi Jinping doesn't direct his government to focus more on stimulating growth, domestic consumption, and income distribution, "China will not be able to increase domestic consumption sufficiently to drive and sustain growth domestically," Tsang added.
Newsweek