Why Consensus Is Too Pessimistic on Chinese Consumption

Research evidence excerpt

Why Consensus Is Too Pessimistic on Chinese Consumption

th has dropped so sharply in such a short period.

Fallacy 3: Housing cannot recover in an aging society

With new starts down 78%, new home sales down 52% and property investment down 47%, China’s housing downturn over

the past five years is similar in magnitude to the 20-year decline Japan experienced after the 1990s peak. After such a deep

correction, housing can bottom if policymakers decide to deploy sufficiently forceful measures. Meanwhile, Japan’s 46%

home-price rebound since 2013 shows that aging demographics do not preclude rising home prices; policy is the key driver.

Fallacy 4: Beijing cannot stimulate consumption

Low inflation, low interest rates, high domestic savings and an undervalued currency imply ample policy room. Weak

consumption reflects not a lack of capacity, but a lack of willingness (Why Beijing Does Just Enough to Achieve Its Growth

Target).

Fallacy 5: China's economy will stagnate once exports falter

It’s a myth that China’s growth drivers stay fixed. Over the past three decades, they have repeatedly rotated between

external and domestic demand, largely in response to shifts in the global environment. In the 2010s when the US was

experiencing “secular stagnation,” China's economy was driven primarily by domestic demand. As exports began to take off

in 2021, China's growth driver shifted from domestic to external demand. A future slowdown in exports would likely trigger

another shift back toward domestic demand.

Fallacy 6: China today mirrors Japan in the 1990s

Compared with Japan in the 1990s, China today has a stronger manufacturing base, an undervalued currency, and much

lower labor costs. Rather than a Japan-style balance-sheet recession, China is experiencing a two-speed economy, with