Differing paces of consumption growth explain some of the media Sturm und Drang around Chinese consumers, but also hint at potential problems ahead
By Nathaniel Taplin
Booming consumption growth among rural Chinese households is being bolstered by government subsidies. Photo: Andy Wong/Associated Press
In the U.S., disaffected rural voters helped elect President Trump. In China, where people this week are celebrating the new year, the urban-rural divide is a bit different: Rural residents are suddenly doing a lot better growth-wise than their urban peers.
That helps explain some of the panicky sentiment around Chinese consumers right now. Upscale Western brands such as Apple —which recently blamed China for slowing sales—target upper-middle-class, urban Chinese. Unless Beijing enacts pro-market reforms to shore up its urban economic engines, bubbly rural spending may not be enough to keep overall consumption growing rapidly. That would remove a key safety net for the economy and risk a “middle-income trap” for China.
Urban China is retrenching thanks to a heavy mortgage-debt overhang, a legacy of Beijing’s previous big stimulus effort in 2016. Urban real per capita consumption, which in 2016 was growing roughly in line with incomes, slowed to a pace 1 to 2 percentage points behind incomes in 2017 and 2018. In rural China, the pattern has been the opposite: Consumption was growing more than 3 percentage points faster than income by mid-2018.
Even though rural Chinese account for only a quarter of total household consumption, they drove around 40% of consumption growth last year, according to Gavekal Dragonomics.
This boom appears to be the result of a surge in government subsidies, rather than organic growth. Eliminating poverty is one of “three tough battles” identified by President Xi Jinping for broad policy support. As a result, central-government spending on poverty alleviation has shot upward, hitting almost 90 billion yuan ($13 billion) in 2017, roughly double 2015 levels, according to the Economist Intelligence Unit.
Loans from state-owned banks such as Agricultural Development Bank of China targeted at the poor have shot up, too, and local governments have also boosted spending.
Rural poverty alleviation is an admirable goal, but may not be sustainable without sparking more debt problems. Rural consumption growth had already started tailing off by the end of last year.
Unless urban households take up the slack, consumption looks likely to weaken further in 2019. A big income-tax cut will help. But if Beijing really wants to keep consumers on an even keel, it needs to revive private-sector animal spirits with real reforms—and a trade deal with the U.S.
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