Clarity on policies, other steps can reassure consumers, investors
Amid softer retail sales data in July, opinions grew over the past week that China should unveil effective measures to increase domestic demand and boost consumption.
Yet few people may have recognized that the Chinese government has already taken a series of seemingly separate but actually integrated steps this year to remove some long-standing obstacles to expanding consumption.
The main title among them was the high-level guideline issued in July to bring extracurricular tutoring services for curriculum subjects into the nonprofit fold, as part of broader efforts to reduce the burden on students and parents.
This followed other regulatory measures to protect data privacy, curb real estate speculation and deepen antitrust efforts. Anyone who has followed the latest news in China will recall the authorities ‘decision to remove Didi Chuxing, a ridesharing app, from app stores for illegally collecting and misusing its users’ personal information.
Each of these regulatory measures has different specific objectives, but their overall objective may be the same: to remedy the problems that have suppressed consumption.
Take the heavy tutoring burden on the students and their parents. This factor has affected the willingness of married couples to have children, thus limiting the consumption of various related goods and services.
Likewise, the big profits of iconic internet companies suddenly seemed to demand a heavy price in the form of potential data privacy breaches, which heightened the sense of income inequality. And housing that requires high expenditure also ultimately reduces the propensity to consume.
In other words, recent regulatory measures have the potential to support consumption because they target the three factors that determine the overall consumption of an economy: population, income per capita, and propensity to consume, which measures the fraction of income. spent.
Even setting economic definitions aside, it’s easy to understand that consumers will be more willing to spend in a society with less cost-of-living worries and muted complaints about wealth disparities. Needless to say, affordable living costs and wealth parity can create a sense of security and equality in the minds of consumers.
China’s relentless efforts over the past decades have been directed towards building precisely such a society. This year marks the first year of the march towards the second centenary goal of building a great modern socialist country in all respects, which envisions common prosperity for all.
In order to stimulate consumption and improve people’s well-being, other measures are likely in the coming years, in particular to close the income gap.
As the 14th Five-Year Plan (2021-25) said, the country will continuously improve the incomes of low-income groups, increase the middle-income population, and more proactively promote common prosperity.
Basic economics shows that lower income groups have a higher marginal propensity to consume, meaning that they are more willing to spend when their income increases than higher income groups, highlighting the need to reduce costs. income inequalities.
There have been developments in this direction lately. The Ministry of Human Resources and Social Security issued a directive with other relevant authorities in July to better protect the rights of food deliverers, VTC drivers and other new forms of labor, urging them to companies to protect their wages and include them in insurance plans.
In addition, China unveiled measures to make Zhejiang province a common prosperity demonstration area. Local authorities are committed to forming an “olive-shaped social structure” to make middle-income households the backbone of the economy.
Structural reforms for social equality and well-being are laudable at a time when downward economic pressure is limited, but improving policy predictability and timely communications with the market are also essential.
What recently scared investors and raised concerns about the threat of regulatory crackdown in a large number of industries in China was not the action of after-school tutoring companies per se, but its nature more stringent than expected.
The Chinese A-share market has not fully recouped the losses caused by this fear. The Shanghai Composite Benchmark Index closed on Friday at 3,427.33 points, down 3.5% from its closing level on July 23, the last trading day before the announcement of new regulations on the sector. tutoring.
In a global market landscape where the anticipated reduction of the US Federal Reserve could trigger investors to exit emerging markets, it is essential to engage in transparent communication with investors on policy goals and next actions. Such a proactive approach will build investor confidence.
This is particularly important when it comes to foreign investors, because the lack of knowledge of the reality on the ground in China can lead to a misunderstanding of politicians.
As Meng Ning, Neuberger Berman’s chief investment officer for Chinese equities, cautioned, “China’s share in the allocation of global asset managers is not high at this point. Therefore, if political uncertainties persist in China, foreign investors may shift their interest to alternative markets like South Korea and India. This risk must be taken seriously.