Summary of Key Points
The main argument of this article is that the current weak consumer demand in China is a cyclical issue (a short-term fluctuation) rather than a structural problem (a long-term trend). By addressing five common misconceptions, the article explains that the weak consumption is mainly due to the reduction in wealth and the impact on expectations caused by the real estate market adjustment. There is still significant room for policy to boost domestic demand; China will not follow in Japan's footsteps (due to the continuous enhancement of its manufacturing competitiveness globally). If the AI boom cools down and leads to a slowdown in exports, policies will shift to support domestic demand, which is expected to improve consumption.
Detailed Analysis
1. Don't confuse “consumption rate” with “consumption growth rate” – Ordinary people are more concerned with “how much more they spent this year compared to last year”
Many people talk about China's weak consumption, often citing the “low consumption rate” (residential consumption as a percentage of GDP, which is 35%-40%, lower than in other countries), but this is a long-term structural issue (such as an imperfect social security system and high housing costs). For ordinary people, the more relevant figure is the consumption growth rate: from 2010 to 2019, China's actual consumption increased by 149%, the highest in the world.
The recent decline in the consumption growth rate from 8% to 1% is not due to aging (a slow-changing factor that cannot explain such a sharp drop) but rather the real estate market adjustment: falling housing prices have reduced household wealth (housing accounts for 60% of household wealth), making people more cautious about spending. This is a short-term cyclical issue, not a long-term trend.
2. Whether the real estate market can recover depends on policies, not aging
Some argue that aging will reduce housing demand and lead to a long-term downturn in the real estate market, but the facts are as follows:
- China's working-age population peaked in 2013, yet housing prices continued to rise for several years afterward due to policy support;
- Japan's housing prices fell for 20 years but rebounded by 50% in 2013, not because of an increase in population, but due to policy stimulus under Abenomics;
- China's current real estate market adjustment is already at a level similar to Japan's after the bubble burst, but whether it can recover depends on expectations: if people think housing prices will continue to fall, they will avoid buying homes, creating a vicious cycle. As long as policies are introduced (such as lowering down payments and interest rates) to change the perception that housing prices will definitely fall, the real estate market can stabilize, and consumption will follow.
3. There is enough room for policies to boost domestic demand – No need to worry about a lack of stimulus funds
Some worry that there is not enough room for policy intervention, but the article refutes this from three perspectives:
- Low inflation: There is an oversupply of goods in the market, so stimulating consumption will not lead to soaring prices (unlike in the U.S. when inflation was high and policy was hesitant to stimulate the economy);
- Low interest rates: Government spending will not “take away” money from businesses (high interest rates would increase their financing costs; currently, this is not the case);
- Controllable debt: China's debt level is similar to the U.S.'s, but the growth rate of nominal GDP (5.4%) is much higher than the interest rate on government bonds (1.7%), reducing the pressure to repay debt. Moreover, most of China's debt comes from domestic savings, so there is no risk of external debt.
Therefore, policies can be intensified (such as issuing consumption vouchers and supporting the real estate market).
4. China will not become the second Japan – Manufacturing is the “ballast”
On the surface, both China and Japan in the 1990s experienced a real estate bubble burst, weak consumption, and aging, but the difference in manufacturing is crucial:
- After Japan's bubble burst, its manufacturing share of the global market fell from 23% to 11%, and the number of its top export categories decreased from 30 to 1;
- China's manufacturing share is still rising at 28%, and the number of its top export categories has increased from 68 to 110.
The reasons for this difference are fourfold:
- Exchange rates: Japan's currency appreciated significantly, weakening its exports; China's currency has remained stable or even depreciated slightly;
- Costs: Japan's per capita GDP was similar to the U.S.'s in the 1990s, while China's is now only 15% of the U.S.'s, making costs lower;
- Credit: After the Japanese banking crisis, banks were reluctant to lend; China's banks are still providing loans to businesses (business loans have increased by 71% in five years);
- Innovation: China's R&D spending has been growing, while Japan's has stagnated; the U.S. has even encouraged China to innovate.
A strong manufacturing sector can buffer the impact of real estate market adjustments and prevent a long-term recession.
5. A slowdown in exports will not cause the economy to stall – The growth momentum will “shift”
Some fear that a decline in exports will lead to an economic collapse, but history shows that China can switch its growth drivers:
- During the Asian financial crisis, it focused on infrastructure and housing reforms when external demand was weak;
- After the global financial crisis, it relied on consumption and the real estate market;
- Currently, exports are strong due to the AI boom (high demand for AI-related products), but if the AI momentum fades (e.g., due to the Fed raising interest rates), exports will slow down. At that point, policies will shift to support domestic demand, allowing the economy to continue growing.
In other words, there is an inverse relationship between consumption and the AI boom: a strong AI boom → strong exports → policies are less eager to stimulate domestic demand; a slowdown in AI → weak exports → increased policy support for domestic demand → improved consumption.
Conclusion
The article aims to convey that the current weak consumption is temporary and not a long-term trend. As long as policies are implemented to change negative expectations about the real estate market and boost domestic demand, consumption will improve. With a strong manufacturing sector, China will not follow Japan's path. A slowdown in exports will instead prompt policies to shift to support domestic demand, making consumption the new driver of growth. Ordinary people need not be too anxious; the economy will remain stable by switching its growth momentum.