Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why Chinas Consumer Confidence Lags Its Factory Boom
Transcript
- Lucas: China's factories are running at full tilt — industrial output is up, exports are hitting records — but walk into any shopping mall in Beijing or Shanghai and the story feels different. There's a real disconnect between the production side of the economy and the consumer side. Luna: You're talking about the gap between the factory boom and consumer caution. The data we're seeing bears that out. Industrial profits were up over 20 percent year-over-year in the first quarter, but retail sales growth is still stuck below 5 percent. Lucas: Exactly. And if walking through these numbers with us has made something click about how the economy actually works, people can support the show at buy me a coffee dot com slash fexingo. It keeps us ad-free and independent. Luna: Yeah, it really helps. A listener mentioned last week that our episode on the property sector helped them understand why their own investments were moving the way they were. That's exactly why we do this. Lucas: So let's dig into the factory-consumer divide. On the factory side, the PMI — the Purchasing Managers' Index — has been above 50 for nine consecutive months. That's solid expansion. But the consumer confidence index is still below 90, well under the boom-time levels we saw back in 2017. Luna: What's driving the factory strength? Is it all exports, or is domestic demand for industrial goods also picking up? Lucas: It's mostly exports, honestly. The trade surplus hit a record in March, and high-end manufacturing — things like EV batteries, solar panels, specialty chemicals — is leading the charge. But domestic orders for those same industrial goods aren't growing nearly as fast. Luna: So the factories are producing for the world, not for China's own consumers. That creates a vulnerability. If global demand softens, those factories have nowhere to offload the extra output. Lucas: Right. And the consumer side is held back by a few structural headwinds. First, the property market — it's stabilizing, not collapsing, but it's not generating the wealth effect it used to. Back in 2020, housing wealth was a big driver of consumer spending. Now, home prices are flat in most tier-one cities and still declining in many tier-twos. Luna: People feel poorer, so they save more. The household savings rate is still around 33 percent, which is way above the pre-pandemic level of about 28 percent. Lucas: That extra five percentage points of saving translates to roughly 800 billion dollars a year that could be spent but isn't. The government has tried to unlock some of that with consumption subsidies — think voucher programs for electronics, cars, even restaurant meals. Luna: But those subsidies tend to be temporary. They push spending forward, but once they expire, consumption often dips back. It's like a sugar rush. Lucas: Exactly. And there's a labor market angle too. Manufacturing jobs pay well, but they're concentrated in certain regions and don't grow as fast as services jobs in terms of headcount. Meanwhile, the services sector — which employs more people and tends to generate more consumer spending — is recovering more slowly. Luna: Is that because of lingering regulation in tech and education, or is it more about demand? Lucas: Both. The regulatory crackdown on tech and private tutoring two years ago sent a chill through the services sector that hasn't fully lifted. And on the demand side, consumers are still hesitant to spend on discretionary services like travel, dining out, and entertainment. Domestic tourism is up, but not as much as expected. Luna: One thing that might help is the yuan. It's been relatively stable around 6.77 to the dollar, which keeps import costs predictable. If the yuan weakened sharply, imports would get more expensive, squeezing consumers further. Lucas: The People's Bank has been managing that carefully. They're using the daily fixing rate to signal stability, and they've drained some foreign exchange reserves to prevent a sharp depreciation. A weaker yuan helps exporters, but it hurts consumers by raising the cost of imported goods — from food to electronics. Luna: So the PBOC is walking a tightrope. They want to support exports without crushing domestic consumption. Lucas: And so far, they've kept the yuan in a narrow band. But the trade surplus is a double-edged sword. It brings in dollars, which supports the yuan, but it also means China is producing more than it consumes, which is not a sustainable long-term model. Luna: Right. The goal for policymakers has to be to boost consumption to match production. That would rebalance the economy and make growth more resilient. Lucas: There are signs they're trying. In April, the State Council announced a new round of measures aimed at boosting disposable income: things like tax cuts for lower-income households, expanding the social safety net, and raising the minimum wage in several provinces. Luna: But raising the minimum wage can also increase costs for businesses, which might lead to slower hiring. It's a trade-off. Lucas: It is. And the effectiveness depends on implementation. Some provinces have raised it by 10 to 15 percent, but that's on a low base. The average minimum wage in China is still only about 300 dollars a month. Luna: So even with a raise, it's not enough to dramatically shift consumer behavior. The real catalyst would be a recovery in housing prices or a sustained improvement in job security. Lucas: Or a policy shock — like a direct cash handout, which some economists have advocated for. But Beijing has been reluctant to go that route, partly out of concern about inflation and partly because the fiscal cost would be enormous. Luna: So we're left with a slow grind. Factories keep humming, consumers keep saving, and the gap persists. The question is how long that can continue without causing problems. Lucas: That's the million-dollar question. If global demand stays strong, China can keep exporting its way to decent GDP growth — 5 percent or so. But if the global economy slows, and domestic consumption doesn't pick up, the imbalance becomes a vulnerability. Luna: And we've seen this movie before. Japan in the 1990s had a similar dynamic: strong exports, weak domestic consumption, and it took a long time to rebalance. Lucas: China doesn't want to repeat that. So all eyes are on whether the consumption subsidies and wage measures this year actually move the needle. If they don't, we might see more aggressive stimulus — maybe even the cash handouts that have been debated. Luna: It's a story worth watching. And it reminds us that GDP growth alone doesn't tell you everything about the health of an economy. Lucas: It never does. Thanks for listening — we'll be back next week with another angle on the China economy.