By Tanner Brown
Zhong Weiyi, who owns an auto dealership just outside the sprawling western Chinese city of Chengdu, isn't feeling confident about the economy.
"If housing prices keep shrinking, I wonder what kind of security I will have in my 70s," the 58-year-old told Barron's in a phone interview. Nearly all of his family's savings have been put into their two apartments, leaving Zhong hesitant to buy much beyond necessities.
While his case illustrates the pain that has continued to flow through the economy since China's property bubble burst in 2021, it reflects only part of the picture. A common view is that the property crisis is the dominant driver of China's other crisis -- anemic consumption. That assumption isn't totally wrong, but it is incomplete, according to a new study.
"More important, probably, is that the yield earned on the average family's financial portfolio has halved since 2019 to just above 2%," said Adam Wolfe, emerging markets economist at Absolute Strategy Research in London.
Wolfe dug into an obscure but authoritative survey of household finance that the People's Bank of China, the country's central bank, published on its WeChat channel in early 2020. It attracted little attention when it came out because the world was focused on a mysterious epidemic emerging out of Wuhan, but Wolfe believes it was significant.
"It's not something that I've seen elsewhere, and highlights one of the major headwinds to consumption growth going forward," Wolfe told Barron's.
Wolfe studied the central bank's methodology and plugged in more recent numbers to get an updated picture. He found that falling yields on financial assets have been an overlooked and leading cause of the decline in household financial wealth and, thus, of consumption.
The problem has two causes, he said. First, the government has been pushing people to invest in safer assets since 2017. While wealth management and trust products accounted for 27% of the average household's financial assets in 2019, Absolute Strategy Research estimates that share declined to 19% by the first quarter of 2024 as families have piled into time deposits.
Second, yields on nearly all financial assets have tumbled. Wolfe estimates that the average yield on wealth management products fell from more than 5% in 2019 to about 2% by 2024 due to tighter asset-management rules.
And as authorities nudged savers into safer securities, households increased the share of their savings going into financial assets -- mainly because people began buying less real estate.
Without enough borrowers on the other side to put those savings to productive use, he said, China fell into long-term stagnation. Money has been locked up in savings accounts, rather than fueling household spending or investments that could create jobs.
Wolfe's analysis also clarifies a much misunderstood metric for consumption in China, where the Communist Party has long hoped it would rise up and lead China's new phase of fast-paced growth. After all, there are a billion potential customers. Analysts and reporters regularly use China's monthly release of retail sales as a proxy for consumption. But in China, retail sales include purchases by government agencies, the military, and some businesses.
"This is a significant distortion," Wolfe said .
Regardless, official data released Monday painted a disappointing picture of both the property market and the broader economy. New-home prices in 70 cities declined 0.67% in June compared to the month before, building on a drop of 0.71% in May -- the steepest slide since October 2014, according to China's National Bureau of Statistics. Values of existing homes were even worse, falling 0.85% last month and 1% in May.
Housing, industrial production, retail sales, and fixed-asset investment all weakened in June, bringing annualized growth in gross domestic product down to 4.7% from 5.3% a year earlier. Both those numbers are enviable for developed countries but paltry for China.
Top Party leaders have been meeting all week at China's most important economic gathering, the Third Plenum, which takes place every five years and focuses on long-term policies. The downbeat data will put more pressure on President Xi Jinping and his small circle to enact much stronger stimulus measures, analysts said.
Expect news Friday, after the gathering ends on Thursday, about what was decided. To what degree the officials will focus on consumption is unknown.
"Consumption's contribution to growth is likely to fade sharply from Q2. If so, aggressive fiscal stimulus may be needed to pull the economy out of secular stagnation," Wolfe said, referring to long-term weak growth. "Central bank intervention in the bond market can't fix this. More fiscal stimulus is required."
But experts aren't optimistic. China has been stingy with its demand-side stimulus measures, such as simply putting money into consumers' bank accounts, instead focusing on supply-side initiatives like infrastructure.
"Sweeping reforms to create a consumption-driven growth model, such as household residency reform or building a universal welfare system, are unlikely," said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.
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July 17, 2024 12:22 ET (16:22 GMT)
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