Zhang Jun explains why - and how - China must stimulate household consumption to achieve a robust recovery

Chinese bank deposits increased by CN¥26.3 trillion (US$3.9 trillion) last year, according to recent data from China’s central bank, the People’s Bank of China (PBOC). Spurred by China’s rigid COVID-19 containment strategy, which the government rolled back in December, household savings surged by CN¥17.8 trillion in 2022, growing by more than CN¥5 trillion in the last two months of the year alone.

To many Western economists and analysts, these so called “excess savings” represent pent-up demand that could lead to a wave of “revenge spending” this year and drive the global economic recovery. But while China is expected to experience a recovery in consumption this year, Chinese households will likely maintain a higher level of precautionary savings over the long term.

To be sure, the increase in Chinese household savings last year is unusual and reflects consumers’ inability to spend as a result of China’s strict zero-COVID lockdowns, which forced millions to remain indoors, sometimes for months at a time. Now that China has abandoned the policy, the floodgates have opened, and it stands to reason that much of these forced savings would spill out, lifting consumption higher.

But not all of the excess savings reflect suppressed consumer spending. A very large proportion of the increase in deposits reflects what households choose to save as a precaution. Chinese households save mainly in the form of housing and financial investment, and last year they delayed home purchases and pulled out of the stock market and other underperforming financial assets in favour of keeping their money in bank deposits. According to several estimates, housing purchases declined by roughly CN¥3-4 trillion in 2022, mostly owing to investors’ expectations of a sustained economic downturn. Even if consumer spending could return to normal this year, heightened uncertainty will most likely prevent Chinese families from putting their hard-earned savings into housing or stocks, so bank deposits will remain higher.

A PBOC household survey, conducted during the third quarter of last year, shows that Chinese households are still inclined to save. Only 22.8% of respondents said they would like to buy more things, compared to 58.1% who said they would like to increase their savings and 19.1% who said they would like to invest more. In part, this reflects the longstanding propensity of China’s population, as two decades of strong income growth have had little impact on households’ saving rate. But it also reflects ongoing wariness about the economy, with Chinese households – already struggling to deal with the rising costs of housing, education, and health care – seeming to play it safe and prepare for a rainy day.

Chinese policymakers must acknowledge the risk that excess savings pose for the country’s economic development and address the cost-of-living crisis that makes Chinese consumers reluctant to spend. While China has made great progress in rebuilding its social security system over the past 30 years, it has yet to provide its citizens with a level of protection commensurate with its economic strength. Even in major cities like Beijing and Shanghai, where household incomes are relatively high, residents still struggle to afford the exorbitant costs of housing, health care, education, and eldercare.

To encourage savers to spend again, China must first make housing more affordable in major cities. Building an adequate supply of government-provided public housing and long-term rentals in urban areas, and ensuring that these apartments and homes meet high safety and quality standards across the country, could disincentivise household saving and encourage more current consumption, especially among younger people.

Apart from affordable housing, providing financial support to families through welfare programs is crucial to restoring consumer confidence. To minimise the heavy burden on households struggling to pay for their basic needs, Chinese policymakers must redesign the government’s fiscal spending. Increasing social protections and offering more welfare benefits for low- and middle-income families could lead to higher spending and a more sustainable development path for the next decades.

But without a major overhaul of its fiscal policy and tax system, excessive household savings could severely impede China’s long-term economic prospects. In recent decades, the Chinese government has relied on a strategy of investment-led, credit-fueled growth to boost aggregate demand and offset sluggish consumption. But the government’s adherence to this strategy over the past decade has inevitably helped to create a speculative property bubble that made housing unaffordable for many and contributed to the country’s ongoing economic slowdown.

It is not too late to change course. China’s economy has reached a pivotal point. The government has the resources and capacity to implement fiscal and welfare policies targeting families rather than industries, and to make such a fiscal system compatible with healthy long-run economic development. But first it must take immediate steps to increase social protection and welfare spending for its low- and middle-income families. If Chinese policymakers spend more on households, they will find that households are more willing to spend.

Zhang Jun is Dean of the School of Economics at Fudan University and Director of the China Center for Economic Studies, a Shanghai-based think tank. Copyright 2023 Project Syndicate, here with permission.