Investors observing China have noted some recent positive trends. China's exports have begun to increase, bolstering economic growth despite a prolonged downturn in the property market and sluggish consumption. Chinese policymakers may see this as validation of their strategy focused on factory-driven growth.
However, a significant structural issue remains largely unaddressed. While the government has introduced policies to support the struggling property sector, it has been reluctant to empower consumers through fiscal transfers or reforms that strengthen public services and social safety nets.
A program aimed at incentivizing households to upgrade durable goods, including cars, fell short by being too limited and narrowly focused. Ultimately, it seems to prioritize boosting industrial production rather than genuinely empowering consumers. By doubling down on supply-side support, China risks exacerbating overcapacity domestically and increasing trade tensions globally. Yet, the country's leaders seem willing to accept these risks because political and geopolitical considerations outweigh economic concerns.
Chinese officials likely observed that robust support for household income in several Western economies helped prepare them for post-pandemic recovery. However, they may also have noted with concern that excessive demand has led to inflation, fueling voter discontent and populism.
A key concern for China's ruling Communist Party is to avoid a repeat of the 1989 uprising, which partly stemmed from soaring prices of consumer goods. Although the causes of inflation then were unique, Beijing remains wary of economic instability. The Chinese saying "He who has been bitten by a snake recoils from a rope" reflects this cautious approach.
Fundamentally, China's political-economic system prioritizes mobilizing resources for societal transformation rather than individual consumption. The ruling elite take pride in the system's ability to achieve ambitious goals through resource mobilization. President Xi Jinping emphasizes strengthening the "real economy," synonymous with manufacturing, to ensure self-sufficiency and national strength.
Unlike other industrialized economies that outsource legacy industries as they advance, China remains cautious of relying on transnational division of labor. Its industrial strategy aims to elevate Chinese manufacturers to dominate both domestic and global markets. This fear of reliance on foreign technology and resources has driven China to develop a comprehensive industrial supply chain.
The vehicle and appliance trade-in program aligns with China's political-economic goals by directing consumption stimulus into manufacturing. The Communist Party derives its legitimacy from the working class, and Xi aims to build a manufacturing superpower rather than a consumer-driven society.
