China: Three major structural constraints prevent boosting consumption - BBH

China's January-February economic data was better-than-anticipated. Meanwhile, China unveiled on Sunday a 'Special Action Plan to Boost Consumption' by raising incomes, stabilizing the housing and stock markets, and improving medical and pension services. In fact, rebalancing the economy away from investment toward domestic consumption has been an explicit goal of China since the December 2004 Central Economic Work Conference. However, three major structural constraints prevent any meaningful effort to boost the role consumption plays in the economy, BBH FX analysts report. 

Fiscal reforms to help China achieve the investment-to-consumer pivot

"i) Low household income levels. China household income accounts for 61% of GDP while in the West households retain a larger share of what they produce, typically 70-80% of GDP. China's investment-driven growth model means that local governments capture a significant portion of economic output due to their control of land sales and infrastructure investment."

"ii) High precautionary savings. Households save a significant portion of their income (over 30% of GDP) due in part to weak social safety nets, falling job security, and an aging population. Moreover, wealth is concentrated among higher-income groups who tend to save more rather than spend. iii) High levels of household debt. Household debt is quite large relative to household income at 145%. For comparison, US household liabilities to disposable income totaled 95% in Q4 2024."

"In our view, fiscal reforms that leads households to have a greater piece of the economic pie in combination with a gradual revaluation of China's currency could help China achieve that long-overdue investment-to-consumer pivot."