One thing is missing from China’s otherwise remarkable economic recovery: a strong rebound in consumer spending. Even though China was the only major economy to expand during the Covid-19 pandemic last year, its growth remains highly unbalanced, relying heavily on exports of manufactured goods to the U.S. and elsewhere. Domestic consumption has lagged, with retail sales shrinking 3.9% in 2020 from the previous year and demand for imported goods falling slightly.
There are many reasons for the weakness. While China’s unemployment rate never shot up as much as unemployment did in the U.S. and Europe, many employers cut salaries or hours, leaving consumers anxious. Many opted to save more—a common tendency in China, which has long had a high savings rate. China’s government also didn’t hand out checks to consumers as the U.S. did, choosing instead to focus stimulus on helping factories and other businesses.
It would also set back China’s long-term goal of building an economy that depends less on investment and factories, which drove China’s economic miracle since the 1980s but are seen as offering diminishing returns over time, including this year. The export growth that lifted China in 2020 could ebb in 2021, as Western consumers resume travel and spending in restaurants and potentially buy fewer toys and gadgets from China.
“You have real restraints on where this recovery could go in China and how much its economy can speed up, if [the government] doesn’t do more on the consumption side,” said Leland Miller, chief executive officer of China Beige Book, a research firm that conducts private surveys on the Chinese economy.
Yan Ling, a 25-year-old teacher living in the central city of Chongqing, said she plans to keep cutting back on what she calls unnecessary goods, such as snacks and clothes, in part because she worries that a possible resurgence of the pandemic could threaten her job stability. While her income has returned to its pre-pandemic level, her monthly salary dropped to only about $460, or a third of its usual level, during the height of the pandemic last year, as the elementary school closed temporarily.
“The pandemic made me realize the importance of saving,” she said.
China’s economy still has considerable momentum, with growth that is expected to hit 7% or more this year, far outpacing the U.S. and other major economies. Some economists believe China’s growth could turn into a virtuous cycle that eases consumers’ concerns and fuels more robust spending.
Wealthier Chinese, like their U.S. counterparts, have largely kept buying, providing a rare source of growth for some Western brands. Munich-based luxury car maker BMW saw its profit rise almost 10% in the third quarter, thanks to a strong recovery in demand from Chinese buyers. Italian luxury-goods house Prada reported a 52% sales surge in China in the second half of 2020.
But China failed to overtake the U.S. as the world’s biggest retail market in 2020 as some analysts had expected, after years of narrowing the gap and despite having a much larger population. Retail sales in the U.S. are estimated to have edged up slightly in 2020 to $6.24 trillion, based on data from the Census Bureau.