Yi Gu Huan Xin Raises Retail Sales by 1.5%p... "Chinese Economy Driven by Consumption"

Yi Gu Huan Xin Policy Raises China's Retail Sales Growth by 1.4~1.5%p
Despite Slowing Household Income Growth, Real Estate Slump, and Deflation Concerns,
Chinese Government's Strong Commitment to Stimulus Expected to Drive Consumption Recovery

As the importance of consumption in the Chinese economy continues to grow, there are assessments that Chinese consumption will maintain its recovery momentum, supported by the government's strong commitment to economic stimulus. On August 29, the Bank of Korea stated this in its August economic outlook report, "Recent Consumption Conditions in China" (authors: Lee Junho, Lee Yerim, Lee Sangheon, Yoo Geonhu).

The importance of consumption in the Chinese economy has increased further in recent times to sustain growth. This is due to heightened external risks following the launch of the second Trump administration in the United States, as well as a reduced capacity for investment-driven growth resulting from excessive real estate supply over the years. Retail sales, which represent Chinese consumption, rose by 5.4% year-on-year in the second quarter of this year. From the fourth quarter of last year through the first half of this year, consumption rebounded thanks to government policies such as the "Yi Gu Huan Xin" initiative aimed at boosting spending. However, since July, the recovery has lost momentum due to delays in policy implementation.

Lee Junho, head of the China Economy Team at the Bank of Korea's Economic Research Bureau, stated, "When looking at China's consumption conditions, there are both negative factors-such as concerns over slowing household income growth, prolonged real estate stagnation, and increasing deflationary pressures-and positive factors, such as the government's strong commitment to economic stimulus and the promotion of policies to expand service consumption. Despite some negative conditions, we assess that Chinese consumption will continue its recovery, supported by the government's strong will for economic stimulus."

This year, at the National People's Congress, the Chinese government decided to prioritize the expansion of domestic demand, including consumption, as its top policy task-unlike last year-and announced a variety of measures to boost consumption. To stimulate the economy this year, the Chinese government is pursuing an expansionary fiscal policy. The issuance of ultra-long-term special government bonds, which fund the Yi Gu Huan Xin policy, was increased from 1 trillion yuan last year to 1.3 trillion yuan this year.

Since September last year, through the Yi Gu Huan Xin policy, the Chinese government has provided subsidies for items such as home appliances, home renovation materials, and electric vehicles. From January this year, the policy's scope was expanded to include items like mobile phones, tablets, and watches. The policy has led to a clear increase in consumption of the targeted items. The Yi Gu Huan Xin policy raised China's year-on-year retail sales growth rate by 1.5 percentage points from September to December last year, and by 1.4 percentage points in the first half of this year.

Lee added, "Given that China's government debt ratio has risen rapidly compared to other major countries, it may be difficult to sustain such strong fiscal stimulus over the long term. However, in the short term, the government appears to have the capacity for expansionary fiscal policy based on its control over the economy."

Policies to strengthen the social safety net, such as expanding medical services, are also expected to help increase households' spending capacity. Lee noted, "Currently, China's public transfer expenditures, such as medical and unemployment benefits, are insufficient compared to other major countries, and the per capita pension amount is also low. As a result, households are trying to increase precautionary savings." China's net household savings rate (35.7% in 2021) is much higher than that of major countries (4.5% in the United States and 8.0% in South Korea in 2024). He pointed out that "government policies to strengthen medical and pension coverage will contribute to consumption recovery by securing basic spending capacity."

There is also an assessment that policies to expand service consumption will help ease consumption constraints in China. The Chinese government is strengthening the foundation for expanding service consumption-such as increasing annual leave and rest periods-in response to changing consumption patterns driven by economic development, and is actively promoting various policies to vitalize service consumption (such as increased policy support for the food and accommodation industries and cultural sectors).

Lee emphasized, "China has a huge potential demand of 1.4 billion people in the medium to long term, and can further expand its consumption base through ongoing urbanization. Rapid urbanization and the increasing settlement of rural migrant workers in cities will have a significant impact on the trend of expanding consumption."

This content was produced with the assistance of AI translation services.