September 17, 2024
SINGAPORE – At the entrance of a store selling household appliances in the southern Chinese tech hub of Shenzhen, a banner screams: “Up to 20 per cent off with state subsidies”.
Inside, green-coloured discount stickers adorn kitchen stoves, washing machines, laptops and more.
Purchasing a new air-conditioner now would shave more than 500 yuan (S$91) off its 2,699 yuan sticker price, a salesperson tells this reporter, pointing to an energy-efficient model.
It is a better offer than what shoppers here would have enjoyed as recently as August – when state subsidies for these appliances were at most 10 per cent.
Footfall at the store was low when The Straits Times visited on a weekday afternoon, but local media reported sizeable turnouts the weekend before, right after the new subsidies were announced on Sept 5.
Across the country, cities like Shenzhen have been increasing subsidies for consumers on a range of big-ticket durable items, under a nationwide programme to boost persistently weak domestic demand.
This depressed consumption, which comes as once-prolific Chinese shoppers cut back on spending amid an uncertain economic outlook, is bad news for China – and not just because it weakens short-term gross domestic product growth.
The bigger problem is that it could feed into a broader deflationary spiral, risking a long-term stagnation reminiscent of Japan’s lost decades.
Already, deflationary pressures are weighing on the world’s second-largest economy.
Overall consumer prices have been growing at a muted pace, and falling in categories such as transportation and communications devices. Factory-gate prices have been in decline since October 2022.
While consumer inflation in August reached 0.6 per cent on the back of higher food prices, core inflation, which measures consumer prices without the volatile food and energy categories, dipped to 0.3 per cent – the lowest in more than three years.
And China’s GDP deflator, which measures broad changes in prices throughout the economy, has been negative for five consecutive quarters – the longest streak since 1999.
It is on track for a sixth straight decline this quarter, wrote economists Larry Hu and Zhang Yuxiao from financial services group Macquarie.
In widely cited comments acknowledging the issue, China’s former central bank governor Yi Gang said on Sept 6 that policymakers “should focus on fighting the deflationary pressure”. He was speaking at a forum in Shanghai.
The fear is that if demand keeps dropping and prices fall, expectations that things will be cheaper in the future could lead consumers to postpone spending, further perpetuating the cycle.
At the same time, profit-squeezed businesses could cut wages or even shutter, making consumers who fear for their jobs even less inclined to spend.
In August, overall retail sales – a measure of consumption – underperformed analysts’ expectations to grow just 2.1 per cent year on year.
Against this backdrop, Chinese cities over the past few weeks have boosted subsidies on selected home appliances and electronics till the end of 2024, and included more product categories that qualify for subsidies under the national scheme to boost demand.
This campaign, first rolled out in March, aims to entice Chinese shoppers to purchase new big-ticket durable items such as cars and home appliances by dangling subsidies and rebates on trade-ins. It also supports the upgrading of industrial equipment.
Each locality in China implements the scheme in its own way, within a framework set by the central government.
In July, China announced an expansion of the programme, bankrolled by an allocation of 300 billion yuan in ultra-long treasury bonds.
The hope is that having the government foot a bigger share of their bill will entice thrifty Chinese to loosen their purse strings.
But despite the Chinese government having long spoken of the need to boost consumption, moving the needle has proven difficult.
“Consumer confidence suffered a significant setback after the prolonged zero-Covid policy and rapid regulatory changes,” Mr Gary Ng, senior economist at investment bank Natixis, told The Straits Times.
He said that a slowdown in disposable income growth, from 9 per cent in 2019 to 5.9 per cent in the first half of 2024, coupled with a decline in the value of households’ assets as property and stock markets perform poorly, have led people to save for rainier days ahead.
While incomes may still be growing, “what’s really the problem is income expectations”, said Mr Tommy Xie, head of Greater China research at OCBC Bank.
He noted that this has been weak in part due to a proliferation of bad news across sectors, such as pay cuts and even layoffs in finance and tech.
Households also lack alternative channels to make money, since the property and stock markets – where people usually grow their wealth – have been doing badly, he added.
Analysts say that state subsidies for consumer upgrades may have helped boost demand in certain areas, but are likely too narrowly focused to turn the tide more broadly.
The Macquarie economists observed that in August, sales of home appliances and mobile phones – which are covered under the scheme – grew 3 per cent and 15 per cent respectively year on year.
But the consumer subsidies are “not enough to change the whole picture”, noted Natixis’ Mr Ng.
Mr Lynn Song, chief China economist at ING Bank, said that the restrictions which the scheme comes with – including on product category and the maximum subsidy amount – limit the incentives for consumers.
“The policies can encourage consumers who may have been on the fence to consider trading in for a new purchase, but are probably less likely to get households which are prioritising saving money to open their wallets,” he said.
To better boost demand and combat deflationary pressures, Mr Song suggests lowering interest rates, and providing more demand-side fiscal stimulus.
Rate cuts, which he expects to occur at least once more before the end of the year, will reduce borrowing costs and ease debt repayment burdens for households.
Mr Song also suggests stimulus measures such as consumption vouchers, or tax incentives that promote consumption more generally.
Outside the store in Shenzhen, located in a busy shopping street, the promise of more subsidies for home appliances did not entice 31-year-old Huang Qiongli to step in for a look.
“I won’t suddenly want to change to a new refrigerator, or a new TV – I don’t buy things like that,” said Ms Huang, who works at a car company.
“Especially since the economy these past two years has not been good, everyone is downgrading consumption,” she added. “I will buy (something) only when I really need it.”