2023IFCFI | Jie Wei: Driving Force for Consumption: Distribution System Reform, Real Estate, or Consumer Finance?

Dear friends, I am delighted to join this forum at the invitation of Dr. Bei. Our session is themed on “ Can Consumer Finance Stimulate Domestic Demand?”. Regrettably, my research on financial inclusion is limited, so as the first speaker, I would like to talk about consumption. I would like to present an overview of the current consumption landscape, allowing all of us to explore the potential role that inclusive finance can play in light of the existing consumption dynamics.


The data for January to June (since September’s data is not yet available) indicates that the contribution of consumption to economic growth is approximately $42 trillion, including five components:


1.     Essential consumption refers to food, clothing, and other consumption goods, which include home appliances, furniture, household items, daily necessities, and information goods.


2.     Housing and travel (on airplanes, high-speed rails, and cars) are also important components.


3.     Culture and education. The statistics include the tutoring industry.


4.     Medical and healthcare; some sports consumption is also included.


5.     Tourism and entertainment.


Regarding the current consumption landscape, there are five situations and two challenges.


Five situations:

Situation 1

Consumption, previously impacted by the pandemic, is gradually recovering, with four sectors – catering, travel, culture, and tourism and entertainment – experiencing the fastest rebounds. It is expected to reach 2019-end levels by September; however, the recovery of other sectors is much sluggish.


Situation 2

The State Council has successively introduced a series of comprehensive policies to encourage consumption and some positive results have shown. Policies including stimulating spending on electric cars in rural areas and adjusting prices in the home industry, although not reaching the desired level, have indeed generated a stimulating effect. For example, the rural expansion of electric cars has catalyzed investment in charging piles and battery swap chain stores, fostering economic growth to some degree.


Situation 3

The role of the platform economy in consumption should be recognized. Recent observations highlight its significant contribution to boosting consumption. Following adjustments to prevent monopolization and algorithmic price discrimination, the importance of the platform economy becomes even more apparent. Therefore, we propose continued support for the platform economy through proactive measures, allowing it a bigger role in driving consumption.


Situation 4

Supply side-driven consumption. Some innovations on the supply side have driven consumption. For example, digital and smart home appliances have boosted consumption upgrading, significantly boosting consumption. Therefore, we recommend encouraging technological innovations on the supply side.


Situation 5

After the pandemic, we find that new consumption demand has emerged, particularly in the rapidly growing healthcare sector. People go to the hospital not just when they are sick. More people are seeking immunity enhancement, so we see a rapid rise in demand for stem cells. Additionally, there has been a significant increase in end-of-life care as a consumer demand. However, these developments require timely adjustments in our legal and policy frameworks. For instance, the recognition of stem cells in the legal field is still pending. The emergence of new consumer demands not only requires technological advancements but also necessitates policy and legal adjustments.


The above are current five consumption situations, which are generally favorable for expanding consumption. However, we also face two major challenges:


Lower incomes have significantly diminished purchasing power. Especially for people who do not work for government agencies or public institutions, the three-year pandemic has resulted in a dramatic drop in their income, leading to a sharp contraction in consumption capacity. This is one of the challenging factors hindering the current consumption recovery.


In the short and medium term, solutions include fiscal and tax system reforms to reduce the tax burden and increase income accordingly. Additionally, monetary, and financial policies, such as financial inclusion, may bolster people’s financial standing. However, in the medium and long term, it may be necessary to address the major issue of reforming the national income distribution system. Especially in the coming years, we need to consider tilting income towards individuals in the allocation of the two major sectors of the national economy.


Here are two ways:


First is national strength and prosperity. In the coming years, should we place additional emphasis on making our people richer? Recent observations indicate impressive indicators of national strength, with notable achievements in terms of national power. However, there has been a significant decline in wealth indicators for individuals, especially those outside formal institutions. While the wages of people who work at government agencies and public institutions may still be relatively stable, individuals outside such frameworks lack a sustainable income source. Going forward, can we prioritize the prosperity of the people? Can we address the distribution of national income to be more inclined towards individuals?


Second, prioritize people’s wellbeing rather than infrastructure. Can we tilt income distribution towards individuals? During the three-year-long pandemic, infrastructure development has been almost unaffected and, in fact, has accelerated even compared to the past. Infrastructure construction has been remarkable on a global scale. However, it is evident that many aspects of people’s livelihoods are not meeting expectations. In China, housing, healthcare, and education consumption are basically market-based, meaning that individuals need to pay for these services mostly out of their own pockets. This situation has forced them to reduce their expenditures in other areas.


Housing consumption remains stagnant despite the implementation of various housing consumption policies, such as “Property-based lending without factoring in borrower’s credit history” “Lowering Down Payment Ratio” and “Cutting Interest Rate on Mortgages.” These drastic policies were expected to have a significant impact; however, the housing consumption remains quite weak.


Based on my research, I have identified a significant change in the supply and demand dynamics of the housing market as the primary obstacle to the market recovery. The market has shifted from a state of excess demand to a more balanced or even oversupplied situation. This transition presents a challenge for policies aimed at stimulating housing consumption. Our research has identified six social phenomena resulting from this shift in the real estate market, including:


First, in light of the considerable challenges ahead, it’s no longer a sustainable strategy to count on housing consumption to drive China’s economy. Housing consumption contributed nearly 20% to economic growth before 2019. The real estate sector alone accounted for approximately 7%; coupled with the construction industry, it was about 15%; if decoration and home appliances also accounted, then it would be around 20%. So, about one-fifth of our annual growth was fueled by housing consumption. However, this was during a period when the real estate market experienced strong buyer demand. And now the market has shifted to a more balanced and even oversupply state, reducing the potential for housing consumption to significantly boost the economy. Recent analyses indicate that, despite various policy measures in place, the contribution of housing consumption is approximately 11%, which is quite good. But don’t be under any delusion that the new housing policies will swiftly stimulate consumption. It is not possible anymore for the moment.


Secondly, the real estate industry has started to undergo consolidation, which has resulted in widespread closures of real estate businesses and layoffs of staff. This situation could go on for at least five years. And we should be fully aware and prepared.


Thirdly, in the face of a transition towards a more balanced supply and demand and even an oversupply situation in the housing market, it is imperative for all developers to reassess their development strategies. Previously, during periods of excessive demand, developers heavily relied on high leverage and quick turnover to drive their operations. However, in the current market climate, this approach is no longer viable. The underlying reason for the end of the era of high yield in China’s real estate sector is that the high leverage and fast turnover model cannot be sustained. This model relies on swift sales, and once sales have problems, the model becomes untenable. Based on our research, approximately eight months after sales tank, a liquidity crisis will occur. It is not a matter of lacking funds, but rather a lack of market demand. The high-profit arbitrage era in China’s housing market has come to an end due to the inability to sustain the high leverage and fast turnover model. The root cause lies in market issues, rather than external factors.


Fourth, the investment appeal of real estate is experiencing a significant decline. Previously, China’s housing market flourished due to speculation driven by excessive demand. However, with the transition to a more balanced supply and demand, it becomes difficult to speculate on housing prices, even if policy allows. The era of rampant housing speculation has essentially come to an end, and this transition is expected to impact the market for about 3-5 years. A considerable portion of capital is tied up in the housing market, creating immense pressure that hinders consumption.


Fifth, conditions in cities vary significantly, due to their varying approaches in supply and demand management. Now the principle of “One City, One Policy” is adopted to replace the one-size-fits-all approach.


Sixth, companies grappling with existing liquidity challenges find it difficult to resolve these issues on their own. We should expect that the government would take prompt action to address these issues. While it is possible for some problems to be resolved on their own when there is excessive demand, this is no longer the case in an oversupply or a balanced market. Think about the multitude of individuals who have worked hard and saved their entire lives to buy a home, only to see their dreams shattered when the buildings are left unfinished. This situation has severely constrained consumption, and it is imperative to address these issues promptly; there is simply no room for further delays. If these issues continue to be prolonged, the impact of distressed major real estate companies on consumption will only grow troublingly larger.


So as the first speaker, I talked about the current two challenges and five situations of consumption in China. I hope I provided some food for thought and let’s see how financial inclusion can contribute in the future.


Thank you all!