How China Can Beat Tariffs (China's Consumption Part 2)

Summary

In this second part of 'How China Can Beat Tariffs,' Paul Cavey delves into the nuanced shifts in China's consumer behavior and its broader economic implications. He argues that traditional measures of consumer confidence and retail sales fail to capture the actual landscape of consumption in China. Cavey highlights the pivotal transition from property investment to time deposits, altering economic activities and affecting inflation. He also discusses the critical roles of high savings ratios and migrant workers in shaping future consumption growth. Cavey suggests strategic areas for policy focus, particularly in addressing the structural weaknesses in consumption to bolster economic resilience.

Highlights

• Paul Cavey examines the real story behind consumption in China, debunking common myths. 📖
• Changing consumer behaviors since COVID have economic ripple effects, especially in savings and investments. 💼
• China's high savings ratio presents both a challenge and an opportunity for economic growth. ⏫
• Empowering migrant workers through better welfare could shift China's economic dynamics significantly. 💼
• Policies focused on social equality could spur greater consumption and address weak structural issues. 🌟
• China's government strategies are crucial in shaping the future economic landscape. 📈

Key Takeaways

• The Chinese consumer story is often misunderstood due to misleading data. 📊
• Shift from property investments to time deposits impacts inflation and economic activity. 💹
• China's high savings ratios are crucial for potential growth but need strategic policy changes. 🏦
• Migrant workers play a key role in China's economic structure but lack welfare benefits. 👷‍♀️
• Addressing social inequality could enhance consumption and promote common prosperity. 🌍
• China has options to boost consumption, yet implementation remains sluggish. 🐌

Overview

Paul Cavey kicks off this insightful exploration into China's economic machinations by addressing the common misconceptions surrounding consumer behavior. He highlights how traditional measures like consumer confidence and retail sales do not accurately reflect the way Chinese consumers spend, especially as they shift away from property investments.

The pandemic has catalyzed significant shifts in consumer behavior — saving patterns have particularly evolved. Instead of propping up the property market, more consumers now lean towards time deposits, a trend that drives inflation down and alters the economic flow.

Cavey urges that the real opportunity for change lies with China's vast population of migrant workers. These essential yet under-supported workers could be key to restructuring consumption patterns if policies evolve to integrate their welfare fully. Despite the potential, government action has been notably slow, yet the path to a more balanced economic approach is clear.

Chapters

• 00:00 - 01:30: Introduction with Paul Ky In the introductory chapter, Paul Ky, an expert in East Asian economics, shares his insights. Based in Taipei, Paul has extensive experience across various countries in the region. He discusses broader economic trends affecting China and highlights TSMC as an interesting point of discussion. His focus is on exploring deeper, structural economic issues impacting Asian economies.
• 01:30 - 03:00: Misrepresentation of Consumption Data The chapter discusses the common misrepresentation of consumption data related to China, raising the point that the narrative around the Chinese consumer market is often based on incorrect data interpretations. It suggests that there has been a consumer recovery contrary to general belief, and emphasizes the importance of focusing on the right data such as consumer confidence and retail sales, rather than potentially misleading metrics.
• 03:00 - 05:00: Trends in Household Savings The chapter discusses misleading ways to interpret consumption data in China. It highlights that such data are often not adjusted for prices, that consumer confidence indicators may not accurately reflect actual spending behaviors, and that spending on services—which has been increasing—isn't adequately measured. The chapter also addresses the misconception that the rise in bank deposits indicates an increase in savings.
• 05:00 - 07:30: Property Market Changes and Savings Behavior This chapter explores recent changes in the property market and their impact on savings behavior among households. It is observed that while people are indeed saving more, the manner in which they do so has evolved. The household savings ratio has returned to pre-COVID levels, suggesting a shift back to prior norms. The chapter discusses the broader economic implications of this change in consumer behavior, focusing on structural consumption trends moving forward. An example is given of typical household behavior in China prior to 2020.
• 07:30 - 10:00: Recent Shifts in Savings and Investment The chapter discusses the recent changes in savings and investment trends, mainly focusing on the average savings ratio of 30% of income. It highlights the significant variation in savings behavior between richer and less affluent households. Before the COVID-19 pandemic, approximately 50% of the savings, equating to about 15% of income, was invested in property. The chapter notes a trend in China where many people were eager to enter the property market as a means of investment.
• 10:00 - 12:30: Migrant Workers and Consumption Policy The chapter discusses the importance of property ownership in the context of marriage and partnership in China. It highlights how the economy relies significantly on household savings, which are often allocated towards purchasing property. The process involves making a down payment to a developer, who then uses these funds over the course of a few years to complete the property, directly tying personal savings to economic activity.
• 12:30 - 15:00: Potential Government Policies for Consumption The chapter discusses the impact of government policies on household savings and economic activity since 2020. Initially, household savings were used to finance economic activities, notably in property. However, since the introduction of restrictive government policies—referred to as the 'three red lines'—there's been a significant decline in property activity, with housing sales dropping by 50% to 60%. Despite this, the savings rate remains at 30%, raising questions about where savings should be directed if not put into property.
• 15:00 - 17:30: Investing in Human Capital The chapter discusses the trends in capital allocation in China, specifically focusing on the return of money to the banking sector. It highlights how the equity market hasn't appeared attractive recently, leading people to prefer time deposits over current accounts due to higher interest rates. This reflects a pattern familiar in traditional economies, emphasizing choices in how households can save money by opting for time deposits to benefit from interest.
• 17:30 - 20:00: Current Government Stance on Consumption The chapter discusses the current government stance on consumption, particularly how money that was previously tied up in property is now moving back into time deposits. This shift is significant because money in time deposits indicates that households are locking their money away, implying they are not using it for immediate consumption. The availability of these funds for investment or consumption heavily depends on the banks finding customers to lend this money to. The chapter emphasizes the dramatic movement of money away from consumption due to its shift to time deposits.
• 20:00 - 21:30: Conclusion and Contact Information The chapter discusses the current economic situation in China, focusing on the record high levels of money held in time deposits.

How China Can Beat Tariffs (China's Consumption Part 2) Transcription

• 00:00 - 00:30 Well, Ky, thanks very much indeed for for joining us. Give the government some confidence. Think about the economy more broadly going well for China. The more interesting story is you look at TSMC. [Music] Hi, I'm Paul Ky from uh East Asia Econ. Um based in Taipei looking at economics across Asia. Um I've been doing it for you know quite a long time. Um lived in different countries across the region. um and and try to focus on some of uh the sort of deeper structural issues that are facing these economies. And so
• 00:30 - 01:00 if you remember a couple of weeks ago, I talked about consumption, consumption in China, which is obviously like one of the big hot topics about, you know, when will there ever be a Chinese consumer story, I think, is the way that a lot of people will look at it. And last time I was talking about how consumption is probably um misreported, right? Like there's a it's misrepresented in the way we think about consumption because people are focused on the wrong data. So the way that I look at consumption I think is actually there's been a decent consumer recovery since co looking at consumer confidence or retail sales is a
• 01:00 - 01:30 misleading ways to think about consumption in China partly because they're not adjusted for prices partly because consumer confidence probably doesn't tell us very much about how actually consumers spend their money and partly because these data measures don't measure spending on services which has been the way that consumers have been moving their consumer behavior over the course of the last few years. Now I also mentioned savings um and and sort of said that the big change in consumer sav consumer behavior is not actually people saving more as much as bank deposits are going up that doesn't show that people
• 01:30 - 02:00 are saving more it just shows that they're saving differently and I think the household savings ratio has normalized to where it was back before co now today I want to focus on a bit more about what the implications of this are and where we go structurally with consumption going forward so there has been a change in consumer behavior that does have implications for the economy. And the best way to think about is exactly this movement of savings. And so previously again, if you go back and think about the way that an average household in China would have operated before 2020, like they maybe have a
• 02:00 - 02:30 savings ratio of 30% of income on average, right? Obviously, there's a lot of difference between richer households and and less rich households in thinking about that, but on average the savings ratio is 30%. probably before COVID about 50% of those savings. So 50% or 30% if you like 15% of income probably something like that was being saved in the form of property. So people going out and buying new property in China, right? That was the big thing where people wanted to get on the property market. They wanted to have um you know
• 02:30 - 03:00 particularly if you're somebody getting married, you want to have a flat because you want to you know that that's better to be able to find a partner and so on. So all of these things are important and that was way a big way the economy worked. And so when we look at savings, a big part of savings are actually directly going to finance activity in the economy because as a if I was a Chinese household, I put my money into a developer account because I'd buy as a down payment for a property which would be finished over the course of the next three years. Hopefully that money would be used to build that property. And so
• 03:00 - 03:30 it financed activity in the economy. So it was savings from a household perspective, but it was directly financing activity in the economy. So what's happened since 2020? Like the government drew these three red three red lines. Property activity has collapsed. So housing sales coming down by 50 or 60%. Households no longer buying property in the way that they were anything like the way they were before co. And yet the savings ratio is still 30%. So what does that mean? Savings now where do you put your savings? Right? You're not putting it in
• 03:30 - 04:00 property. Until maybe the last couple of weeks or so the equity market hasn't looked very attractive in China. So instead this money has come tended to come back into the banking sector and specifically the money has tended to come back into the banking sector in the form of time deposits. So if you remember like um uh for for sort of I guess traditional economies right like you have two ways you can save your money like you can put your money in the bank in a current account where you get no interest or you can put your money in a time deposit where the interest rate tends to be higher. Now, if you're a household and you're putting your money
• 04:00 - 04:30 in property, which was locked up for years, it's not too much of a stretch to think that money can now come back into time deposits. But if money is in time deposits is very different from giving your money to a property developer because that money essentially is not going to be used, right? Like unless like from a from a household perspective, the very fact that you're putting your money you're locking your money up suggests you're not going to use it. So, it's really dependent on whether the bank can find a customer to lend that money to. So this movement of money I mean and and the data is dramatic right the proportion of money
• 04:30 - 05:00 held in time deposits today is at a record high in China. Why does that matter? Because there's quite a good correlation between the pro that this sort of liquidity preference is this movement of money into time deposits and what happens with inflation which obviously should make sense. If money is being locked up in time deposits it's not in the economy velocity falls. If velocity falls then inflation comes down. So as I said the change there has been a change even though consump consumption hasn't changed that greatly
• 05:00 - 05:30 since co there has been a change in consumer behavior and that consumer behavior does have an impact on the economy because money coming back into the banking sector into time deposits specifically does mean that inflation falls and that's one of the things that been happening in China over the course of the last 2 to 3 years inflation is much lower than it used to be because of this locking up of money. The second implication that all of this has of the economy is really like the external surplus and the current account at least from sort of like a theoretical perspective. So if you think if you remember back to the economics textbooks
• 05:30 - 06:00 the difference the current account surplus is also the difference between investment and savings in economy. So if an economy is saving more than it's investing the current account will be bigger than it otherwise would be. So, if you think about this this um change in behavior I've described for households where they're not really saving any differently than they were before, but they are investing less than they they were before because they're not buying property anymore. So, essentially what you're seeing in China today is a at least in an important one important sector of the economy is a
• 06:00 - 06:30 widening of this gap between savings and investment. That should mean that the current account surplus is also widening. And although there's a lot of controversy about the data in China and specifically about the current account data, it does look from other measures that the external surplus in China has been improving. So we know import demand isn't going up, export demand has been very strong. So these kind of things are again a reason why as much as consumption hasn't really fallen since co the change in behavior that there has
• 06:30 - 07:00 been from households does have a direct implication for how we should think about where the economy works today and therefore is something that the government and policy makers need to be thinking about if they're concerned about the current account surplus or if they're concerned about what's happening with uh inflation in the economy. So that's where we we we stand today. So where do we go from here? what can start to change this? So sort of if you're in an optimistic frame of mind, one of the things you can focus on is the fact that the savings ratio is so high. So savings ratio is 30% or thereabouts. You know,
• 07:00 - 07:30 at least on sort of the official data are kind of ludicrously high compared with anywhere in the rest of the world. So obviously if you're interested in boosting consumption, one of the things you don't necessarily need household income to grow up a lot, although that's obviously a helpful background, but one of the things you can focus on is what reduces the household savings ratio. So if there's policies that can address that, then consumption in China can be stronger than it otherwise would be. The second thing to be focused on in terms of where consumption might go from here
• 07:30 - 08:00 is this um uh group of workers in China, right? migrant workers, 300 million workers who are actually important part of the story because it important part of the macro story in China because they're um help the economy to work the way it does. It's like uh you know from a corporate perspective it means you have a lot of flexibility in the labor market because there's not a lot of protection for these workers. Now one of the sort of interesting areas for debate within the mainland is whether this group of migrant workers who again is maybe 300 million people it's not a
• 08:00 - 08:30 small number whether they should be playing a role in the in terms of government policy to boost consumption. So the idea is this is a big group of people. They sort of live like officially resident in rural areas but live in urban areas perhaps in a construction site or working in a restaurant. Like as a lot of people know they don't have urban hook urban household registration which means they don't have the right to use healthcare or or medical uh education facilities in in the city. So often the kids are back in the countryside living with the grandparents like so essentially these
• 08:30 - 09:00 are important workers in the way that the economy works but they haven't benefited from the same welfare benefits that a lot of the urban people have benefited from over the course of the last 2030 years and they certainly haven't benefited from the same property price appreciation that's boosted the incomes of urban residents for that very long period of time. So there's one debate in China which is now it's time to repay these workers right these are the people who've given their blood and sweat without very much protection to build China now it's time to repay those
• 09:00 - 09:30 to repay that cost to do something to help this migrant worker uh group of migrant workers and this is quite an interesting proposal because you can see how it would be attractive right there's 300 million workers they're not properly resident in urban areas they often don't have housing one of the problems that China has today is there's an excess of housing, right? There's this because property activity slowed so suddenly, there's all of this property that have been built that now nobody wants to buy. So there's excess property. Somebody needs to live in it. It would be better
• 09:30 - 10:00 if prices were going up rather than coming down. It would be better if there was demand for this property. The second thing is that these uh obviously their income levels are low, their savings levels are also probably quite low. So they would benefit a lot from the sort of welfare spending that urban areas can benefit from as well. So if there was a government program that allowed these migrant workers to live in some of this um vacant property that exists in China today but also does something to encourage their urbanization by providing welfare benefits which means
• 10:00 - 10:30 that they were then property property resident in urban areas so could participate in the consumer patterns that urban areas have. This also starts to boost both consumption in China, reduce the savings ratio and also does something about social equality which also should be important you know as we hear Shinpin saying right like common prosperity this thing should matter. So there's an important so there's sort of two things to be focusing on I think in terms of consumption going forward. One is the savings ratio being high. The second thing is this group of migrant
• 10:30 - 11:00 workers who've been uh discriminated against in the past sort of both economically and also socially. So I think the important thing about mentioning these two things is it does seem that China does have options, right? Like it's it's often thought that the economy is in a bad way. It's sort of difficult for China to get growth in the future. Economic growth is definitely going to slow down. Like actually when you think about it, there are some things some sort of um obvious ways where the government could be pushing in terms of policy to try to get
• 11:00 - 11:30 a result which boosts consumption. And again the point about this is that consumption in China is quite weak on a structural basis. So it's important to differentiate between these two things. In the first video we talked about consumption from a cyclical perspective. So that's how consumption is doing relative to the cycle relative to how quickly it usually grows. Consumption has caught up with the precoid rate of growth. But that pre-COVID rate of growth is not particularly high because consumption is only 40% of GDP. Whereas
• 11:30 - 12:00 other economies it's more like 60 70% of GDP. So the important point the point I'm talking about today is less about this cyclical issue in terms of consumption. It's more how do they they address this structural issue that consumption is relatively weak as a percentage of GDP. Now the other reason why this migrant worker group um is important to be thinking about in terms of why this might be attractive way to try to address consumption is because like one the government has obviously and sin ping himself has specifically
• 12:00 - 12:30 said he doesn't like welfareism like and the sort of like US western style consumerism is also something that's not as sort of a taboo word in China right like it's not something that the government is going to want to be seeing encouraging so this kind of talk from prominent economists that the government should be giving the sort of cash handouts to the consumer that the US did and many other economies did in 2020 and 2021 like that sort of thing like it's much more of a difficult sell in China and actually if you think about what's happened in some of the other Asian economies since 202021 they had those
• 12:30 - 13:00 big cash handouts as well but consumption has weakened anyway so if you think about somewhere like Korea where again the government was quite generous during COVID there's been no sustainable rebound in consumption since so I I think there's reasons to be sort of skeptical about why those kind of policies could work in China. The other reason why the migrant worker thing is interesting is because there is a way that this can be dressed up like you can do some welfare spending on the consumer which isn't welfareism because it's
• 13:00 - 13:30 investing in human capital. So if the government is spending money on things like education and healthcare, this is about improving people's lives and putting them in a better position where they can be economically useful to the economy. Right? If you're better educated, if you have better healthcare, you're going to be more useful than you would by would be otherwise. And I think, you know, we have seen some of this from some of the mainland China economists talking about this in this way that this is it's not so much a consumer program. It's more about investing in human capital and improving
• 13:30 - 14:00 the lives of ordinary people. So, in a way, it's like politically palatable consumerism, if you like, in the in the mainland China context. So I think there is something in this kind of policy that's being talked about. So where we are today is where consumption has been you know cyclally is is in a relatively decent position I think in China today structurally is still quite weak. The big solution or the big obvious solution to try and address that structural weakness is really to focus on this migrant worker and for the government to
• 14:00 - 14:30 give more welfare spending to them. Now the disappointing thing from all of this is that still there's no sign of this happening. So during from September last year through to the end of last year there was a lot of talk about how the government was going to have a more active policy but in terms of fiscal policy that was very much focused on local governments and investment problems that local governments were having. There was very little talk about how the government was going to use money for the consumer. the central economic work conference at the end of December, the government did say that increasing consumption would be one of the big priorities for this year, but
• 14:30 - 15:00 that's been said before and given that there wasn't any more fiscal money to be backing that up that was announced previously, you have to be somewhat skeptical that very much is going to change. So, I think where we are today is that actually there are ways that the government could increase consumption, but it doesn't look like that's going to happen very quickly over the course of, you know, the next few years. It doesn't look like the government is following up on these on these proposals to do something to focus on the consumption uh capacity of migrant workers. But I think
• 15:00 - 15:30 from an investor point of view, if you are interested in consumption and think that that has a role to play in the economy, it is this group of workers who you probably should be focusing on and seeing when policy does change towards them because it does seem that that's probably got the biggest capacity to have the impact on cons consumption in China in a politically palatable way that some of the other policies won't have. So over the course of the last couple of weeks spent some time talking about consumption first of all from a cyclical perspective and you can go back
• 15:30 - 16:00 and look at the video from a couple of weeks ago to talk about that. Again a lot of that is focused on the sort of nittygritty of the data. Today talking a little bit more in macro terms about what the implications of the change in consumer behavior have been. That change in behavior a lot of it is about the way that people save rather than the people the change in people's savings behavior rather than their spending behavior. That savings rate being very high is the prime reason why the consumption rate relative to GDP is so low in China. A big way to address that is doing something about migrant workers. As an
• 16:00 - 16:30 investor, that's the thing to be focusing on to see where the policy is going to change. If you're interested in this sort of content, then please look at my website uh east asia.com. There's a ton of charts on there which are interactive with all the data that can be downloaded. And if you're an institutional investor and interest in in um looking into these issues in more depth, then please get in contact with me about a subscription.