Wednesday, October 4, 2023

China’s Large Income Gap Cuts Consumer Spending | Business and economic news

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China’s successful control of Covid-19 made it the only major economy to grow last year, but a wide gap in income inequality and still weak consumer spending reflect an unbalanced recovery.

Here’s a closer look at some of the underlying data released with the Gross Domestic Product report this week:

Income gap

Official figures released on Monday that show the economy’s growth rate exceeded pre-pandemic levels in the last quarter also revealed that the richest 20% of Chinese had an average disposable income of over 80,000 yuan. ($ 12,000) last year, 10.2 times what the bottom 20% earned.

The multiple in the United States is around 8.4 and closer to 5 in Western European countries like Germany and France, according to data from the Organization for Economic Co-operation and Development. By this measure, China’s inequality levels are comparable to those of Mexico, where the richest 20% earn 10.4 times the poorest 20%.

President Xi Jinping has called the country’s unequal income distribution a threat to its future growth, with officials considering more redistributive policies to encourage household spending. The latest data shows that little progress has been made so far, with the income gap remaining largely stable since 2015.

Low consumption

Data for the year 2020 also showed that while China’s suppression of the virus allowed normal economic activities to resume in the second half of the year, household spending growth has yet to recover to pre-market levels. pandemic.

China’s per capita consumption, after adjusting for inflation, fell 4% in 2020. This is comparable to the forecast for personal consumption expenditure in the United States, which is expected to have declined by 3.8 % in 2020, according to a Bloomberg survey.

Retail sales fell 3.9% in 2020 from the previous year, a steeper drop than in developed economies like the United States, where government payments to stranded at home workers and the unemployed supported spending on consumer goods.

Like other economies, China’s spending on services has suffered more than spending on goods due to closures and fear of the virus, with restaurant spending falling nearly 17% the last year.

However, China’s effective removal of Covid-19 has allowed almost all consumer services to safely reopen by the second half of the year. After falling in the first three quarters, spending on restaurants and accommodation such as hotels rose 2.7% in the last three months of 2020.

Retail sales growth also accelerated, registering 4.6% year-over-year growth in December, but remains below pre-pandemic growth rates of around 8%.

Economists have offered two explanations for relatively moderate consumer spending: a weak labor market and higher precautionary savings.

Millions of migrant workers lost their jobs in early 2020 as factories, shops and restaurants were closed to contain the virus. When lockdowns were lifted later in the spring, some opted to stay in their rural hometowns, with official data showing the number of migrant workers fell by 5.2 million in 2020 compared to 2019.

China offered relatively little direct support to households hit by first quarter job losses, meaning many had to rely on savings they are now trying to replenish.

“At present, Chinese households are still saving three percentage points more on their income than before Covid,” according to Houze Song, researcher on the Chinese economy at the Paulson Institute.

Industry is getting ahead

Unlike consumption, China’s industrial economy hit new records in 2020. Crude steel production exceeded 1 billion tons for the first time, and rolled steel and aluminum production also increased with increased investment in real estate and infrastructure.

The overall growth of the services sector was 2.1% in 2020, lagging behind the expansion of GDP, while the industrial sector which includes manufacturing and construction grew by 2.6%. There were bright spots for the service sector in 2020 according to a sectoral breakdown of growth released by the National Bureau of Statistics, with strong expansion in information technology and finance.

Government support

Weak private spending led to a decline in the share of consumption in the economy last year, contrary to Beijing’s long-term goal of creating a more consumer-oriented economy.

However, the decline was less dramatic than expected, as the share of final consumption in GDP only fell by 1.4% compared to 2019, according to Ning Jizhe, head of China’s statistics bureau. This may be due to increased public spending on consumer goods and services, as Beijing eased controls on public debt to encourage economic expansion.


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