Consumption is crucial to China’s economic growth, but the latest COVID-19 outbreak is derailing progress. A new set of opinions from the State Council offer solutions to bolster the China consumer market, offering foreign investors insight into how policymakers aim to stabilize and reform the country’s future consumption landscape. We break down the proposed measures and their sector impact.
As the latest wave of COVID-19 hampers economic activity in some of China’s largest cities, the State Council has issued a new set of opinions on boosting consumption in the coming months and years.
The opinions, which were released on April 25 and are titled Opinions on Further Unleashing Consumption Potential and Promoting Continued Recovery of Consumption (the “opinions”) (link in Chinese), take aim both at post-COVID recovery and reforming the consumption landscape to create a safer and more equitable environment for both market players and consumers.
The Opinions propose 20 measures for boosting consumption in both the short term and the long term. Among other proposals, they reiterate the need for tax relief and financial support policies for small businesses impacted by the pandemic, offer mechanisms for expanding consumption sectors from specialty agricultural products to healthcare services, and call for boosting employment and wages for low-income workers.
The Opinions fall in line with China’s long-term development strategies, which rely in large part on domestic consumption to fuel growth. Below we discuss why consumption is important to China’s future growth trajectory and look at what measures the opinions propose for stimulating consumption.
There is both a short-term and a long-term need to boost consumption in China.
In the short term, China is eager to prop up economic growth in 2022 by increasing consumption. This is particularly important in a year when the government has set an ambitious 5.5 percent GDP growth target, and the country readies itself for the 20th Party Congress in the fall when the CCP’s top leadership will be appointed (or reappointed). Stability and a strong economy will be important to cement the party’s legitimacy in the run-up to this event.
Moreover, consumption will be a major driver of post-COVID recovery. This was already the case during the 12-month period between mid-2020 and mid-2021, when China’s early success in containing COVID-19 led to strong economic growth, in particular in early 2021. Now, as another wave of COVID-19 and the associated lockdowns and prevention measures wreak havoc on the economy, officials will once again be hoping to lean on consumption to return to 2021 levels of growth.
In the longer-term, consumption plays an exceedingly important role in China’s overall economic strategy. The country’s long-term growth strategy has been formalized through a number of policies, including the “Dual Circulation” strategy and the “Common Prosperity” initiative.
China’s dual circulation strategy aims to spur domestic demand (internal circulation) and simultaneously develop conditions to facilitate foreign investment and boost production for exports (external circulation). Common prosperity, on the other hand, seeks to create a more equal society by raising the incomes of low-income groups, promoting fair competition, and better balancing regional development, among other goals.
Consumption is central to the success of both of these policies. It is the core driver of “internal circulation”, while a healthy, fair, and balanced consumption environment will provide more opportunities for gaining financial security and creating growth opportunities (note that Chinese officials have stressed that Common Prosperity will not be driven primarily through welfare).
It is for these reasons that officials have been repeatedly stressing the need to stimulate consumption since late 2021, with the calls growing ever stronger in the first quarter of 2022. The government has recently released several initiatives to improve the consumption environment, although many of these will likely not see an impact for several months, if not years.
At the end of March, the General Office of the Central Committee of the Communist Party of China (CCCPC) and the General Office of the State Council released a set of opinions on how to use the corporate social credit system to improve trust in society, which also aims to improve consumption by better protecting the rights of consumers and increasing product and service quality and oversight.
On April 10, the CCCPC and the State Council also jointly released a set of opinions on creating a “national unified market”. This document outlines the creation of a national unified market to improve standardization and consistency in the implementation of regulations across a wide range of industries in China, which among other things – aims to boost consumption.
The need to boost consumption has been a regular talking point for Premier Li Keqiang during the weekly State Council meeting, which he presides over. The premier even hinted at the new measures for boosting consumption in a meeting on April 14, in which he advocated for measures, such as providing more support for retail, hospitality, and catering, among other COVID-hit sectors; increasing consumption of large commodities (for example, cars) and services; and improving online-to-offline (O2O) integration.
However, concrete and codified measures specifically aimed at stimulating consumption had not been released, until now. The new measures provide some clarity on how the government intends to boost consumption in 2022 and beyond, with measures for short-term stimulus and longer-term reform.
The document contains several measures for the post-COVID recovery of consumption. These include measures that will provide short-term financial relief for companies through measures, such as tax rebates, as well as controlling prices and preparing for possible future scenarios in which the consumption of basic commodities could be disrupted.
The measures propose several tax relief policies for companies that have been impacted by COVID-19, particularly vulnerable market entities such as micro-, small-, and medium-sized enterprises (MSMEs). These measures include:
The opinions also call upon local governments to step up efforts to support hard-hit industries by:
Similar policies have already been put in place, with China deferring a total of US$39 billion in tax in March 2022 on the back of tax relief policies for MSMEs first implemented in late 2021.
Moreover, the Opinions also call upon financial institutions to do their bit to support impacted companies by:
The Opinions also seek to support companies in high-risk industries to implement COVID-19 prevention measures, calling for certain regions to carry out regular nucleic acid testing for employees in industries, such as retail and catering for free, and subsidizing enterprises’ epidemic prevention and disinfection expenditures.
Some regions of China, and especially Shanghai, have suffered severe shortages of basic food and supplies during COVID-induced lockdowns, as logistics chains were disrupted due to restrictions on movement. This also led to cases of price-gouging – a major issue as some sellers took advantage of the limited supplies, putting further pressure on consumers who had nowhere else to turn.
Seemingly in response to this, the Opinions take aim at ensuring the supply, transport, and stable prices of basic goods in the event of a crisis. Among other measures, the document proposes:
To ensure consumption in the longer term, the Opinions propose a wide range of mechanisms for improving the consumption environment and reducing barriers to consumption. They also go beyond simply promoting consumption, and instead offer a vision for the direction in which consumption will develop and seek to guide consumption trends in that specific direction.
One such direction is toward more domestic consumer brands. The Opinions specifically propose ways in which China can strengthen the intellectual property and product and service quality of domestic brands across a variety of industries.
Specifically, the Opinions call for:
The Opinions also take aim specifically at the agricultural sector, proposing ways in which to increase recognition of domestically produced agricultural products. Improving the consumption of agricultural products is also closely tied with China’s “rural revitalization” and “common prosperity” goals, which aim to boost the under-developed rural and remote areas of the country. Improving recognition of and consumer attitudes toward high-quality domestic agricultural products is one way to reroute money to the country’s poorer areas.
To improve product quality in the agricultural industry, the Opinions propose:
As China’s economy continues to mature, increasing the consumption of services will be vital to ensuring long-term growth. The Opinions target service fields, such as healthcare, elderly care, and childcare services, which still have significant growth potential in China and serve the dual purpose of increasing consumption and ensuring vital services for the population.
Focusing on the development of services of import to the elderly population may also be a way of ensuring long-term growth as China’s population continues to age rapidly.
Specific suggestions include:
Unlike many other countries around the world which rely on international travelers, China’s large and increasingly wealthy population means that the country’s tourist industry can rely primarily on domestic travelers. Although the industry has been particularly hard-hit by the COVID-19 pandemic, it nonetheless has significant growth potential in the long term. The government seeks to further capitalize on this by promoting novel forms of tourism, including:
Moreover, the Opinions look to tap into emerging tourist fields and expand consumption during traditionally off-peak seasons and hours by:
Consumption will also play a role in China’s ambitions to “green” the economy and decrease carbon emissions. To this end, the Opinions recognize the need to increase awareness of “green” consumption among consumers, calling for more to be done to:
To shore up consumption in the long term, the Opinions also propose ways to improve the infrastructure for selling and distributing goods and services to consumers.
At the same time, they recognize the need for ensuring the population has adequate means to spend by addressing issues, such as unemployment and income.
Among other suggestions, the Opinions call for certain qualified regions to cooperate with foreign institutions to build foreign-related consumption zones in free trade pilot zones.
They also propose improving infrastructure to facilitate consumption. Measures include:
The Opinions offer ways in which to increase employment and income in order to improve the consumption capacity of the population, specifically targeting lower-income workers, new entrants to the job market, the self-employed, and those working in new work formats. Proposals include:
Moreover, the Opinions also call for improving wages by improving wage determination and minimum wage adjustment mechanisms and steadily increasing the wages of wage-earners, migrant workers, and other workers.
Meanwhile, to improve the wages of rural workers, the Opinions propose further developing rural industries and implementing direct subsidy policies for farmers.
To increase consumption of large-scale goods, such as cars, the Opinions call for removing restrictions on purchasing new cars and requiring regions that have already implemented restrictions to gradually remove them. In addition, qualification requirements for car buyers should be relaxed and cities should employ differentiated policy indicators for urban and suburban areas for purchase restrictions.
Moreover, the Opinions call for establishing and improving the management mechanism of the automobile modification industry and accelerating the development of the automobile aftermarket. They also state that the policy restricting the relocation of second-hand cars will be completely abolished, and the cross-provincial measures for the registration of small non-operating second-hand car transactions will be implemented.
China has been steadily improving the consumer environment in recent years through stronger consumer protection laws, personal information protection laws, and better oversight and regulation of market entities. Mechanisms, such as the corporate social credit system mentioned earlier, have also been deployed to increase oversight over market entities and hold companies that fail to comply with laws and regulations to account while also improving consumers’ courses of action in the event of a violation. Moreover, this mechanism seeks to improve fair competition, another crucial element to improving the consumption environment.
The new Opinions build upon earlier developments by doubling down on laws and regulations that ensure fair competition, protect consumer rights, and prevent dishonesty in consumer industries.
To improve fair competition in the consumer space, the Opinions call for:
To improve trust and oversight for consumers, the Opinions propose:
Finally, the Opinions also target means to improve channels through which consumers can take action to protect their rights and submit feedback
The Opinions call for improving the “12315” hotline, a nationwide complaint hotline for consumer matters, and establishing a publicity system for consumer complaints to improve transparency. They also propose optimizing the consumer dispute resolution mechanisms and public interest litigation systems, and possibly establishing a consumer class action lawsuit system.
The single largest barrier to China’s consumption recovery and economic growth at this moment in time is the continued implementation of COVID-19 prevention measures, especially lockdowns and restrictions on movement. The latest outbreak in various parts of the country has led to shortages of supplies in some areas and a logistics crisis along the east coast as local governments impose restrictions on truck drivers and other logistics workers. This has seriously hampered consumption in the first quarter of 2022, and in turn, slowed national economic growth.
Another important factor in the recovery is the stubbornly high unemployment rate, which is similarly affected by the COVID-19 pandemic. Unemployment in March 2022 reached 5.8 percent, while the number of jobs per applicant decreased.
Short-term measures, such as tax rebates and fee reductions, may serve to soften the blow for companies that have been the hardest hit by the pandemic. Incentives for small businesses that provide the vast majority of employment in China can also help to ensure companies do not lay off more staff.
Given the current challenges, there has also been a significant amount of speculation surrounding whether or not China will choose to implement more concrete stimulus measures, such as stimulus checks for businesses and households, as the U.S. did in 2020. The Chinese government, however, has been very resistant to this idea, repeating the mantra that it would not “flood” the market with liquidity, and is instead advocating a “prudent” monetary policy.
It is now possible that they may be slowly coming around to the idea, however. In April, several local governments began implementing policies to issue consumption coupons with a total value of over RMB 5 billion (US$750 million), to be issued over varying periods in 2022. The coupons subsidize a variety of consumer goods and services, including retail, food and beverage, cars, and home appliances. Many of the coupons were issued over the recent Labor Day national holiday from April 30 to May 4 in order to boost spending during the holiday period.
Preliminary data shows that the coupons have had some positive effects on consumption. According to a report from Chinese digital media outlet Jiemian, consumers in Beijing picked up 124,800 coupons through the app of the electronics and appliances retailer Suning, which led to RMB 35 million (US$5.2 million) in sales. Meanwhile, in Ningbo, Zhejiang Province, the retailer’s sales increased by 35 percent year-over-year during the Labor Day holiday.
Ultimately, however, only a return to normalcy and stability can truly set the country back on the path toward recovery. In the short term, it is therefore difficult to see how the suggestions proposed in the opinions will have a significant impact on consumption.
Longer-term, however, the Opinions hold water. Initiatives to improve the quality of domestic products and services through better standardization and oversight will continue to strengthen domestic brands’ standing among consumers. Extending these principles to industries such as agriculture can also unleash significant consumption potential in new areas of the economy. Meanwhile, proposals to improve the wages of lower-income workers and improve equality will give more spending power to a wider portion of the population.
China will still need to get back on the path to recovery for the suggested measures to take effect. The latest COVID-19 outbreak will most likely be brought under control and restrictions lifted in the near future, but the question remains what happens if another outbreak occurs. Stability over the long term will need to be achieved for consumption to increase again.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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