China Tries to Stoke Consumer Spending With Small-Business Plan

On Monday, central authorities directed local governments to step up a range of measures to assist small business, according to a public notice from the Ministry of Industry and Information Technology and the cabinet-level State Council. City and provincial authorities must set up special funds that will be used to support cheaper loans, and provide subsidies for business expenses such as rent, utilities, and other operating costs, according to the notice.

Local governments were also told to provide support levels based how adversely a given business has been affected by the pandemic, which was exacerbated by the country’s draconian zero-Covid policy. Shanghai was locked down for well over a month, and the restrictions are now extending into parts of Beijing. The moves have taken a massive toll on businesses across the country through shipping stoppages, road-freight delays, and restrictions on worker movement—not to mention outright business closures.

The latest assistance also allows select businesses to reopen if they had been previously ordered closed, and if they are in areas free from Covid-19 breakouts or employ a closed-loop system, in which employees live at their workplaces or undergo routine testing.

The measures announced Monday are among the first to actually require immediate implementation, following nearly a month in which policy makers released only draft opinions or proposed business-related policies to boost consumption. 

Last week, the State Council said large state-owned banks will increase loans to smaller businesses by at least 1.6 trillion yuan ($240 billion), according to its official website. The banks were also told to ease requirements such as credit scores for borrowers.

But in the preceding weeks, high-level economic meetings have resulted in a slew of consumer stimulus proposals, though few if any contained timelines for implementation.

It is unclear how much these stimulus measures will boost consumption, a part of the economy China has been trying to shift toward even before the pandemic. This has become acutely needed recently, as China’s longtime engine of growth, exports, has begun to weaken. Last month, shipments fell into single-digit growth, hitting a two-year low, according to the National Bureau of Statistics.

In March, the last month for which data are available, retail sales fell 3.5% year-on-year, the first contraction since August 2020, driven largely by hard lockdowns, stagnant wages, unemployment among young spenders, and savings in an uncertain climate. Experts across the board agreed that the the weakening likely continued into April.

“Normally, I would definitely not be called a ‘saver’,” said 29-year-old Beijing-based Alan Li, who works at an Apple store in the city. “But if the virus spreads, I may not work for who knows how long?” he said shrugging.

Mark Tanner, managing director of marketing research firm China Skinny, said, “Consumer sentiment is hurting everywhere in China. Many are obviously aware of what is happening in Shanghai, which is building uncertainty.”

“Consumers are also well aware of the transmission rates of Omicron and potential for strong lockdowns. Few have dodged it.

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noted that 72% of the 225 cities that it operates in experienced Omicron outbreaks last quarter. This is coupled with rising unemployment, and the not-so-rosy real estate market which has historically had a significant impact on consumer confidence,” he told Barron’s from Shanghai.

Yet China is mostly focused on supply-side measures, such as infrastructure stimulus and tax cuts for businesses, which doesn’t address the economy imbalance, said Michael Pettis, finance professor at Beijing University.

“The problem is that a real solution would involve a significant weakening of China’s export sector, which depends on low wages relative to productivity for its success, and would undermine the country’s investment model before the benefits of higher consumption show up. This is probably why rebalancing is always a strategy for the future and never a strategy for the present,” he told Barron’s.

“Disbursements of cash and consumption vouchers are a plausible short-term solution, but even in the best of cases they are way too small to matter, typically representing a fraction of a percentage point of that month’s GDP,” he said.

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