Consumer spending makes up the bulk of economic activity in mature economies, most notably in the U.S. where it is around 70% of the economy. The much-maligned American consumer society not only held up the U.S. economy for years, but also helped drive China's growth rate by absorbing a large chunk of its exports. But now, U.S. consumers are tapped out, and therefore cannot be counted on to suck up more Chinese goods. Meanwhile, Europe's economic malaise means that it cannot be counted on either to help mop up surplus Chinese goods. That duty now falls to the Chinese consumer, whose spending comprises just 44% of the country's GDP.
To empower the Chinese consumer, Beijing needs to put more money in people's pockets and make them feel comfortable enough to spend it. One way to do this is to make goods cheaper by lowering taxes, like the national 17% VAT tax. VAT taxes have a negative impact on consumer spending as they basically tax people for shopping. Lowering or removing the VAT, along with a number of other state and local consumption taxes, would have a direct and immediate positive impact on consumer spending.
The country should also look for a way to keep Chinese consumers from spending money abroad. Chinese consumers spent nearly $50 billion overseas last year, which was up 66% from 2010, according to China UnionPay, the nation's largest credit card issuer. China's overall retail sales growth was up 17% during the same time, far less than the growth in foreign spending. The Chinese are traveling more than ever before, but one of the primary reasons is because they want to go shopping for goods that they either can't get in China or that are too expensive due to all the heavy taxes and import duties. Prices for luxury goods in China are around 50% higher than in the U.S. and a whopping 72% higher than in France, according to the Chinese Ministry of Commerce. The World Luxury Association estimates that the Chinese consumer made up around 62% of all luxury sales in Europe last year. Ironically, much of what they are buying was originally made in China.
But it isn't just the well-off Chinese buying Prada purses that should be targeted here. The Chinese consumer market could get a huge boost from just a fraction of growth in spending by the billion or so Chinese who live on meager wages. The Chinese government may consider sending out stimulus checks like the U.S. did during its last recession to give a temporary boost to consumer spending. For a longer term fix, the government should allow wages to slowly rise across the country or possibly institute a minimum wage so that more people can afford to buy the things that they have been making all these years. Of course, these policies should be balanced and introduced gradually to ensure that the gains in consumer spending aren't eaten up by inflation.
Ultimately, the Chinese need to feel comfortable spending to help China move into its next phase of economic growth. Improvements in the nation's social security system would go a long way to make it easier for Chinese people to spend more and save less. The net effect could be a strong increase in economic activity, which could help China avoid any sort of landing, be it hard or soft.
