Sara Hsu
Sara Hsu

China´s central government tries to shift its economy from investment-driven to a consumer-drive one. While the effort seems to have effect, financial analyst Sara Hsu points at a few bears at this road in the Diplomat. Will the consumers keep on spending more? It´s in the hand of the government itself.


Sara Hsu:

First, the crackdown on official purchases of luxury goods has taken a toll on consumption. Diageo, a drinks maker, reported a $444 million decline in sales in the fiscal year ending June 30. Most of this decline reflected a sharp reduction in demand for its popular white liquor, baijiu, through its subsidiary company Shui Jing Fang. Diageo is one of many luxury goods companies that has been adversely impacted by China’s anti-corruption campaign. At the same time, China’s mainstream consumers are increasingly aware of, and interested in purchasing, luxury brands. While the anti-corruption campaign has made a dent in luxury spending in the short run, in the long term high-end consumption is unlikely to be affected.

Second, the construction of retail centers that remain empty has occurred in recent years, as lack of growth sources from other sectors prompted government officials to allow a stark increase in fixed asset investment, including real estate development. Many owners of these shopping areas will likely experience heavy losses, as they fail to attract either stores or shoppers. Despite this problem, consumption in hot spots throughout China remains strong. The trend in consumer preferences for shopping locations changes, and has not negated the overall upward movement in consumption numbers.

Real threats to increasing consumption in the long run do exist, however, and have to do with the rate of hukou, or household registration, reform, and the urbanization process itself. The hukou process has long prevented rural residents from permanently moving to urban areas, and the leadership has vowed to reduce hukou restrictions for some. The extent to which this policy is carried out will greatly impact the sustainability of the consumption trend: the rural sector remains relatively worse off than the urban sector, and the hukou remains the biggest formal barrier against urbanization and the associated increase in living standards. Closely related is the urbanization process, which has focused on physically moving individuals to urban areas without ensuring appropriate job creation. By implementing urbanization policies in a superficial way, some regions have raised living standards in the short run without creating the means to sustain it in the long run.

The tide of consumer spending is growing in force, and the leadership does not want to see it end. While the current lag in luxury spending and real estate occupancy may be temporary, serious barriers to building a consumer society remain. Ironically, these barriers are in the hands of the government itself. The policies that are implemented, and the order in which they are carried out, will determine if the ultimate goal of raising and maintaining consumption can be achieved.

More in the Diplomat.

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