Can China’s domestic consumers replace U.S. ones?
Investing.com -- China’s consumers could, in theory, absorb the blow of a collapse in exports to the United States, but only with much greater government support than policymakers currently appear willing to provide, according to analysts at Capital Economics.
“Retail sales in China are more than ten times larger than the country’s exports to the U.S.,” the firm noted, suggesting that only a modest 4% rise in domestic goods consumption over two years would be needed to offset the likely RMB2 trillion hit from U.S. tariffs.
However, “this would require policymakers to increase fiscal transfers to households well beyond what they have announced so far.”
Retail sales rose 5.9% year-on-year in March, a 14-month high, but Capital Economics cautioned that the gain was “largely” due to a consumer goods trade-in scheme.
“While it can have a big impact on the composition of consumption, it only increases households’ spending power by the amount of the subsidies themselves,” the firm said, adding that this year’s RMB300 billion in trade-in incentives amounts to just 0.2% of GDP.
The firm noted that real income growth slipped in the first quarter, and without larger fiscal transfers, it sees little chance of a rebound.
Lower household savings could provide another path to stronger consumption, but that would require “households to become more confident about their finances,” which may hinge on a recovery in home prices, according to Capital Economics.
“If house prices remain under pressure and the trade war weighs on wider confidence, then it will be up to the government to convince households to reduce their precautionary saving,” the firm said.
While further policy support remains possible, Capital Economics remains “sceptical that Chinese households will be given enough of a helping hand to allow their spending to fully offset the loss of U.S. demand.”
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