China is serious about boosting domestic consumption
Is "X" trillion still important?
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On Monday, the Politburo met again. The post-meeting readout excited the market, at least for a day. Among the unusual pro-easing language is a unique line:“全方位扩大国内需求All-round expansion of domestic demand.”
The market at first responded very strongly to this. It was almost like a repeat of the late-September rally, a sign that the market found this kind of expression surprising (it should not be).
But that mini-rally lasted for just one day, before slumping back to somewhat where it started. It then seems that after the up and down in September/October, the market is finding it hard to believe there is anything substantial this time. Investors doubt whether there will be an “X trillion” magic number announced in the CEWC, which may be underway right now.
For me though, neither is this new expression from the Politburo is surprising, nor will there be a magic number at CEWC.
Nor is this magic number necessary.
A continued obsession with a magic number reflects the market’s lack of understanding about two things: 1) the Chinese government’s determination to boost consumption is real; 2) consumer support program in China will not happen in the same way it happened in the US, where Washington DC just handed out a check to all.
In this article, I will explain why.
Consumption is in focus
For decades, people have been griping that Chinese policies are too pro-production. It is quite true. After all, China just emerged from absolute poverty within a generation’s time. Our mindset is still more bothered by scarcity issues, rather than over-abundance.
So an “all-round expansion” of domestic production has been driving Chinese policies for decades. A central mission of the Chinese government is to encourage industry development and create industrial champions for key sectors.
But to think China will be always like this ignores several important new developments.
First of all, China itself has increasingly realized the negative effect of over-production. It’s not just about trade tension coming out of out-producing every country on earth - but mainly about something purely domestic too. Over-competition (and over-capacity) leaves no profits for most industry participants, thus placing a cap on how much companies are willing to their employees, driving down salaries, driving down domestic demand, further driving down corporate profits, and sending the whole economy into a vicious cycle of…deflation.
China is like this poor person who for her whole life wanted to get rich, and who has recently become rich, but has suddenly faced the problem that sometimes, having too much stuff can actually be problematic.
Not only there is already a realization about this, but incremental measures have also been taken to change it.
Take the pivotal Politburo meeting of September 26 as an example. It was already quite unequivocal about the relationship between consumption and “民生people’s livelihood”, a core concern of the Party:
要把促消费和惠民生结合起来，促进中低收入群体增收，提升消费结构。要培育新型消费业态。要支持和规范社会力量发展养老、托育产业，抓紧完善生育支持政策体系
Combine promotion of consumption with improving people's livelihood, boost income for middle and low-income groups, and upgrade consumption structure. Cultivate new forms of consumption. Support and regulate private sector participation in elderly care and childcare industries, and expedite the improvement of fertility support policy system.
Following that meeting, you start to see policies that you would not otherwise understand if your mental model is still that China is all about supporting production. For instance, the export tax rebate cut on PV, batteries, and some metal products was such kind of policy that I commented on in my personal newsletter . (Paying subscribers of Baiguan enjoy free access to this one, please find me if you haven’t got it already.)
And there are also baby-step measures aiming at directly subsidizing the consumers. People only think about subsidies on home appliances (which are having an impact), but in places like Shanghai, consumer voucher programs aiming at dining and offline leisure seem to be working too.
Why the baby steps? Why can’t they fire the bazooka once and for all?
One big reason is that in today’s China, things are so intertwined, and it’s often politically impossible to do a dramatic action in one go, as every policy will hurt someone else.
For instance, when they cut back on export rebates on PVs and batteries, they were hurting the interest groups in those industries. And trust me, even in a patriarchal (my preferred word instead of “authoritarian”) system like China, those interest groups will howl like crazy because of this pain.
When they introduced delayed retirement, they were hurting those who wanted to retire early. And the dramatic crackdown on the education industry only serves as a painful reminder of what havoc an over-dramatic move can wreak.
I will talk more about “why the baby steps” in the case of domestic consumption in the last section, but for now let’s zoom in on Shanghai’s experience.
The Shanghai model of subsidizing consumers
In September, Shanghai announced a consumer voucher program called ”乐品上海Enjoy Shanghai” and allocated (only) 500 million RMB (~$70 million) for it. After the successful 2 initial rounds, Shanghai just recently announced 1 more round for December.
According to this journalist affiliated with the Ministry of Commerce:
Since Shanghai began issuing the first round of "Enjoy Shanghai" dining vouchers on September 28, public interest has continued to grow, with "voucher grabbing and dining consumption" becoming a hot topic in Shanghai's dining scene. According to statistics from the Shanghai Municipal Commerce Commission, the first two rounds distributed over 6.03 million dining vouchers, with a leverage ratio of approximately 4.2 [Baiguan note: this suggests for 1 dollar of voucher leads to 4.2 dollar of incremental consumer spending ]. Notably, in the second round, all four voucher types increased their discount rate to 30% off, significantly stimulating consumption enthusiasm and effectively boosting the city's dining market atmosphere.
Many restaurant managers report that these dining vouchers have significantly helped improve business operations. At New Ya Cantonese Restaurant on East Nanjing Road, there's a constant stream of customers, with lunchtime queues becoming the norm. Restaurant F&B Director Cai Mengyun states that voucher orders now account for 20% of total orders, with October revenue increasing by over 30%. She believes the vouchers have effectively encouraged dining out, noting, "Previously, bad weather would affect customer flow, but in the past two months, business has been bustling daily, second only to the Spring Festival atmosphere."
…
According to the Consumption Big Data Laboratory (Shanghai), as of November 26, offline dining consumption in Shanghai during the voucher period totaled 58.39 billion yuan, up 11.4% year-on-year, with participating restaurants showing notably narrower revenue declines in October. Meanwhile, average daily foot traffic across 35 city-level and district-level commercial areas increased by 10.1% compared to the same period last year.
Chen Qiang, manager of Haidilao Hotpot's Bund location, notes the gradually increasing impact of the vouchers on consumption. "On November 23-24, the Bund location served over 2,000 customers, with weekend reception up 3-5% year-on-year. About 15% of customers presented and used vouchers, an increase of about 5% from before."
All of these vouchers in Shanghai have a very specific scope. Some are for dining, others are for going to the movies. They usually are as specific as an exact list of eligible merchants for each voucher.
And they can be very generous too. For a family gathering meal of ￥1000, a consumer might only need to pay as little as ￥600.
Another key feature is that those vouchers are not freely distributed to all people, but would have a fixed quota, and consumers will have to collect it on their own at a pre-announced time.
Most importantly, those vouchers all have an expiration date, which usually lasts for as short as 10 days. So it’s not something you can just store away in your wallets and save it for another day.
This combination of features has created at least three effects. First is “hunger marketing”. The consumers aren’t waiting to receive vouchers but will scramble for them. In the latest round of handouts, those vouchers were almost immediately taken after posting online. In fact, there are now even scalpers openly selling “second-hand” vouchers on e-commerce platforms, showing the popularity of this program.
The second effect is instant consumption from those who are afraid to let vouchers expire. For instance, last weekend, I experienced the worst traffic jam I have personally experienced for a weekend in at least a few years. The restaurants that I visited were all packed. People, after scrambling to collect vouchers, scramble to spend them too.
of our team also saw a huge crowd at the Xintiandi shopping area on the same weekend. [As more of BigOne Lab’s proprietary data come in, we will publish another post on what our data tell about the effect of this program. Stay tuned]The last effect is more vague, but no less important.
Just take a step back now and think about this: does the sheer size of the program really matter now?
It does, but only up to a certain extent. Because it is not just a consumer subsidy program. It’s a game, just like a lottery. It’s not just about the numbers. It’s about excitement. It’s about serendipity. It’s about fun.
This “fun and excitement” is the true essence of the Shanghai experience, it’s also how Shanghai seems to have managed to turn the tide of the consumption downturn with relatively small fiscal resources.
And isn’t “excitement and fun” what it should be all about when we talk about consumption anyway?
Excited consumers, consume. Excited spenders, spend.
Local government first, consumer second
So why can’t the Chinese government initiate such kind of program nationwide?
I believe they will, but the way it will unfold will be different from what you imagine, and it points to a key misunderstanding (or lack of understanding) of China.
If you look very closely at Shanghai’s experience, you will inevitably ask this question: can this model really work in other places? Shanghai is using its own municipal budget to do this, but aren’t other local governments in China too cash-strapped to do this?
Even if they have the money, the programs they will introduce will be vastly different from that of Shanghai, because of the vastly different social and economic differences across regions. A nationwide, one-size-fits-all program in this case is likely to create many inter-regional bickering (“Why do Shanghai residents get ￥100 voucher for KFC, while we only get ￥10”?) and is thus unfeasible.
The central government does not want to be politically exposed in this case at all, but will only leave it to the local governments to decide on their own “games”. After all, it’s also the local governments who understand better about what works and what doesn’t in their local areas. (And if they do mess up, the blame will not be placed on the center.)
But do local governments have the financial means to design their own “games”?
Now is the time to review again what I wrote on Nov 11, when the market was let down by the 6/12 trillion debt-swap program for local government hidden debts (6 or 12 trillion?). These two topics are very much intertwined:
When you look at the Chinese economy today, the weakest sector in the entire economy is our local government sector. And since local government accounts for more than 80% of our government expenditures, effectively the entire government sector, a core engine of China’s economy, is in trouble.
Anyone who is counting on a Keynesian demand-side stimulus assumes that the government sector is ready to come in and fire its cannons. But in China’s case, the government sector itself needs to be fixed first. This is also because unlike US, which can print dollars almost indefinitely and let the world foot the bill, China can’t.
Therefore, any meaningful stimulus would not succeed without sorting through the mess at local governments first. A one-trillion or two-trillion cash subsidy program sent directly to residents that many foreign investors were dreaming about won’t solve this more urgent local government debt crisis. And even if there will be a direct-to-consumer support program in the future, it will be done mostly via local governments, not directly from Beijing like what the US did during the Covid years. This is because our vast regional disparity forbids the existence of a one-size-fits-all program that could only breed resentment rather than boost demand. In China, there is an old saying: “不患寡而患不均 We are more afraid of inequality than we are afraid of poverty”.
Fixing the local debt problem involves working on two somewhat conflicting tasks at the same time: 1) relieving some pressure off the back of local governments, while 2), installing fiscal discipline to avoid moral hazard so we do not end up in the same overinvestment-induced debt crisis again.
You see, these things happen in progression. The first order of business is to get the local government’s financial situation in order, only then can we contemplate a more meaningful consumer-support program. After all, it will still be up to the local governments to implement anything similar to “Enjoy Shanghai“.
So what to expect now?
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