Decades of investment-led growth and industrial policies have led to overcapacity concerns, at a time of soft consumption growth, contributing to deflation, posing a drag on company earnings, household income and fiscal revenue.
In brief
- Policymakers have recently shifted away from prior decades’ focus on investment towards consumption-led economic growth.
- Taking stock of households’ balance sheets in our view is the first step towards accessing the potential impact of recent fiscal policy measures.
- A cautious sentiment has prompted households to increase cash deposits, allocate away from both financial assets and real estate, and repay mortgages, which has also started a gradual repair of household balance sheets.
- Structural challenges remain, but recent consumption support marks a positive shift in policy response.
China’s economic growth this year has been a tale of contrasts—strong exports but weak consumption. Decades of investment-led growth and industrial policies have led to overcapacity concerns, at a time of soft consumption growth, contributing to deflation, posing a drag on company earnings, household income and fiscal revenue. Recent weakness has prompted policymakers to shift the focus from investment-led to consumer-led economic growth. To assess the outlook for consumption and the related impact of the policy stimulus in China, however, it is essential to examine the state of households’ balance sheets and their vulnerabilities.
The Asset Side
1) Cash & deposits
Chinese consumers are cautious savers, with the household savings rate at 31.7% in 2023 (as calculated by J.P. Morgan Economic Research). As a result, cash and deposits make up around a quarter of the household wealth, aggregately amounting to RMB 149trillion. This represents a huge potential to be unlocked for spending and investments. So why do Chinese consumers have such a high propensity to save?
- Structurally, issues such as ageing population, an insufficient social safety net and income inequality prompt consumers to save more. Moreover, growth in per capita disposable income in China has slowed significantly from an average of 9.6% year-over-year (y/y) in 2010-2019 to 5.1% in 2023 (according to National Bureau of Statistics), prompting households to feel a higher need to save.
- Cyclically, a weak job market has contributed to consumers’ insecurities, prompting more cash savings. China’s September youth unemployment rate sits at 17.6%, after hitting fresh new highs for two straight months. The purchasing managers’ (PMI) employment sub-indices continue to decline and wage growth remains muted. This has caused consumer confidence, especially employment confidence (Exhibit 1), to remain low, and failing to recover back to pre-pandemic levels. Low confidence levels suggest that even if households obtain additional income, they might prefer to save than to spend or invest.
Exhibit 1: China consumer confidence
Index
Source: National Bureau of Statistics, CEIC, J.P. Morgan Asset Management.
Data reflect most recently available as of 18/10/24.
2) Property
With property accounting for 50-60% of household wealth (the single largest component on the asset side of the ledger), the property slump since 2021 following the peak of the property boom has significantly eroded household wealth, deterring consumption. J.P. Morgan Economic Research estimates that a 10% decline in housing prices will drag household real consumption growth by about 1.5 percentage points.
3) Equity and other investments
While this line item accounts for a relatively small portion of household wealth, the impact of investments on wealth still has a strong psychological impact on Chinese consumers. The recent price rebound since late September did help lift sentiment levels, but CSI 300 is still 32% lower than the peak in 2021 (at the time of writing), so various investment accounts will take time to recover past losses.
The Liability Side
1) Residential mortgage loans
According to the People’s Bank of China, in 3Q24, Chinese consumer loans totaled RMB 58trillion, with 65% made up of residential housing mortgages. Despite the government’s demand-side efforts to stimulate housing demand through the relaxation of mortgage policy (lowering rate for existing mortgage loans, lowering down payment ratio for second homes etc.), the property cycle remains lackluster. Instead, Chinese households opted to prioritize mortgage repayments rather than increasing spending. Growth in outstanding residential mortgages has declined as households have been de-leveraging, with residential mortgage growth contracting 2.1%y/y in 2Q24 from its 4Q16 peak of 37.1% (Exhibit 2). The repayment trend in part reflects the accumulation of excess savings in recent years as well as the lack of investors’ appetite for domestic financial markets or properties.
Exhibit 2: Growth in outstanding residential mortgages
Year-over-year change
Source: People’s Bank of China, CEIC, J.P. Morgan Asset Management. Data reflect most recently available as of 18/10/24.
2) Credit card loans
Beyond residential mortgage loans, another 14.8% of consumer debt is related to credit card loans. Like residential mortgage loans, credit card loan growth has been declining, with related debt contracting since 2Q23. As households pull back demand for consumer debt, bank retail loans may grind lower which in turn could affect banks’ profitability amid the already lowering of deposit rates.
Ongoing deleveraging, gradual repair of households’ balance sheets
As noted, households’ deposit growth in China has risen since early 2020, which is likely owed to the impact of the lockdowns (Exhibit 3). Households remained risk averse due to the cloudy economic and market outlook, with the latter manifesting in the re-allocation from domestic financial assets to bank deposits and sparked the ongoing deleveraging trend, culminating in the improvement in households’ balance sheets. This has resulted in households’ excess liquidity, proxied by deposits less loans, rising rapidly. Typically, households can deploy the excess liquidity through various channels such as investing in financial assets like equities or real estate. Thus, the large amounts of deposits and recovering liquidity represent a large potential to be unlocked into consumption and investments once conditions are met through various support.
Exhibit 3: Chinese Household Deposits and Loans
Rolling 12 month new increases (trillion RMB)
Source: People’s Bank of China, CEIC, J.P. Morgan Asset Management. Data reflect most recently available as of 18/10/24.
Policy support moving in the right direction
Late September, policymakers introduced consumption support policies and have seen preliminary signs of success so far. For example, the trade-in programs on cars and appliances have contributed to September retail sales hitting a four-month high. Automobile sales growth flipped from negative to positive, and household appliances and audiovisual equipment rose by 20.5%. The one-time cash assistance for low-income households is also a proven effective policy with a significant multiplier effect, as low-income households often prioritize immediate spending to address essential daily needs, instead of saving or investing.
It should be noted that direct cash handouts is a rare form of aid in China (a universal handout will create a large fiscal burden), so the introduction of this policy can be seen as an encouraging sign of a mindset shift towards larger-scale consumption support, which could re-ignite consumer confidence.
Having said this, while early policy successes can be observed in specific product categories or income groups, more broad-based and sustainable recovery hinges on job prospects. This will take time given the structural challenges. On the goods side, the Chinese economy is transitioning from relying on labor-intensive manufacturing to new economic sectors that are more capital-intensive. On the services side, regulatory headwinds against sectors such as internet, education, healthcare etc. have and will likely continue to ease further to stabilize sentiment. Further policy focus in addressing skills mismatch through this economic transition and supporting private businesses and innovation to revitalize the job market, bears watching in the medium term.
In conclusion, while the recent stimulus package can give consumption a temporary lift, the longer-term benefit lies in the gradual repair of consumer balance sheets (through policies to alleviate mortgage burdens and stabilize housing prices etc). Targeted policy aimed at revitalizing the job market, broadening social security spending, leading to long-term strengthening of social safety net, will be helpful in lowering the household savings rate. This way, the additional liquidity from the recent balance sheet repair can then be translated into more spending and investments.
Investment implications
As Chinese policymakers are making great strides to deliver on consumption-focused policy support, there are opportunities for investors, particularly those who have been sitting on the sidelines. In the very near term, the Standing Committee of the 14th National People’s Congress will reaffirm policymakers’ priorities towards achieving stable growth when they reconvene next week. More support towards addressing the macro fundamentals which in turn could bolster corporate earnings for a more sustainable rally would hopefully be announced at the top legislative meeting. Without this, it could result in episodic pullbacks in the equity market as we have seen in early October.
As the market awaits more details of the fiscal policy measures, investors should seek opportunities in high quality and profitable Chinese companies in the technology and communication services sectors where valuations are still in line with long-term averages.
A rebound in Chinese consumer sentiment could also have a knock-on impact on demand for imports of goods and services from elsewhere in the region. For instance, a pickup in tourist arrivals could support service-oriented sectors in some parts of Asia, providing a further tailwind beyond the consumer electronics and artificial intelligence related boost. All told, active management will be key when it comes to investing in China, with Chinese equities providing a good diversification opportunity outside the concentrated U.S. equity market.