The Implication of China’s Slower Growth for Household Incomes and Spending
The rate of growth of China’s total real GDP has been slowing over the last decade and is projected to slow further in future years. Already there is some expectation in the market that the 2019 rate will be below 6% - which is consistent with Global Demographics Ltd.’s own forecast.
However, do note that while it is a lower figure than before it is still positive – that is growth continues, just a bit slower. But it does have implications for many aspects of the economy and this paper looks at the likely changes in the total value of consumer spending over the next 5 years.
The assumption is that GDP growth will be 5.6% for 2019 slowing to 3.5% by 2024. The main cause of this decline is virtually no further growth in the overall size of the labour force (although growth in the urban/tertiary labour force), slower growth in worker productivity and significantly slower growth in Fixed Capital Investment.
Under these assumptions it is expected that real GDP growth will slow to 3.5% per annum by 2023 and that growth in average household incomes will be down from 8.44% pa for the last 5 years to 3.8% pa to 2023. This in turn significantly impacts overall household spending and the future distribution of households by income.
The impact of these changes is detailed below.
There is little disagreement with the expectation that the real growth rate of the total economy of China (as measured by total real GDP) is slowing. Furthermore, some factors causing this slower growth are structural rather than financial. That is, they are items that would be difficult to change in the short-term. This includes:
1) The size of the labour force. Overall it is in decline in absolute size – down from 773.4 million in 2018 to 759.7 million in 2023. Not a major decline but certainly different from the scenario of the previous 5 years where it grew by 10 million in total. Do note however, that while the total labour force is expected to decline, the urban labour force will continue to grow as a result of continuing rural to urban migration. Rural to urban migration is currently at 20 million persons a year including dependents, but this is expected to slow as the number of young rural people declines. Consequently, the rate of growth of the urban labour force is also projected to decline.
It will be difficult for the labour force trends to be different from that forecast as:
a) the persons of working age are all alive today and we can accurately determine how many there will be in each year through to 2023.
b) Life expectancy of persons over 50 years is still in the mid-70s so the ability to keep persons in work longer is constrained.
c) The propensity to be employed is already high in China (it is one of the highest by world standards) and there is no upside potential there.
So overall one must accept that the number of ‘workers’ in China is growing at a slower pace (urban) and declining steeply (rural) for the next decade.
2) Worker Productivity Growth is also slowing. There are two factors causing this
a) The increased accumulated fixed capital per worker is having a reduced marginal impact – this is a simple result of ‘diminishing returns”. The first computer in an office has considerable impact on productivity – the 100th doesn’t.
b) A projected slower rate of growth in total Fixed Capital Investment per annum due to increasing debt and lower returns on capital means either less take up of workers (employment) or lower productivity per worker – and we assume that maintaining full employment is more important than the productivity growth rate – so long as it is positive.
c) The increased standard of education is now at a point where it is difficult to increase significantly in future. The initial big gains of moving a very significant (60% +) of the labour force up to having completed lower secondary level education has been achieved. As such the marginal secondary educated worker has a less significant impact on productivity.
The combination of number of workers and productivity per worker gives total GDP and as both these ‘inputs’ are slowing in growth so does total real GDP growth. The net effect of these influences means the Global Demographics forecast for China’s total real GDP is as shown in Figure 1.
Figure 1: Historic and Projected Trend in Total Real GDP Growth
The slower growth in GDP per worker (productivity per worker) means that wage growth also slows as we do not expect any continued increase in the share of GDP that is paid out in wages. Wages as a percentage of GDP per worker grew from a very low (by world standards) 49% in 2011 to 57% in 2018 reflecting the Government wish to increase the consumption share of GDP growth. However, we do not expect that percentage to increase further in the short term given the current global economic environment which is slowing and the impact of the trade disputes. Anything that increases the cost of a finished product is probably not considered at present.
As a result, average urban and rural household incomes are projected to increase as shown in Figure 2. Whereas average gross urban household income (i.e. before tax) grew in real terms at 7.9% p.a. for 2013 to 2018 for the next five years it is projected to grow at a more modest 3.8% per annum – lifting from US$21,980 p.a. in 2018 to US$26,467 p.a. by 2023.
Figure 2: Historic and Projected Average Household Incomes (US$ 2017 values)
As shown the rural growth rate also moderates from 5.8% per annum to 2.9% per annum giving a change in gross household income in real terms from US$6,848 to US$7,918.
Figure 3 shows the expected change in the distribution of urban households by gross income. This demonstrates the impact of a slower overall GDP growth rate. Whereas for the previous 5 years the number of urban households with an income over US$15,000 in 2017 values increased from 88.7 million to 168.01 million – nearly a 100% increase - for the next decade this same income segment will increase to 198.5 million households – in short adding just 30 million affluent households. Whereas the highest income segment grew by 11 million households over the last 5 years it is projected to increase by 12.6 households million for the next – so same absolute increase but a slower rate of growth of the affluent market.
Figure 3: The Distribution of Urban Households by Income 2013 to 2023. (US$ 2017 values)
It is worth noting from Figure 3 how the definition of middle-class changes. In 2013 it was the US$10,000-US$15,000 segment. By 2018 it had clearly changed to the next step up – US$15,000 to US$25,000 and that is expected to remain the ‘middle class’ for the next five years – and it is also expected to stay at around the same absolute size of 96 million households.
What about spending? Total earned income (average household income multiplied by number of urban households) is projected to grow from US$6,092 trillion to $US7,901 trillion – growing at 5.33% per annum. This compares with 10.2% per annum for the previous 5 years.
Will expenditure match that – we think not. The propensity to save is high in China even amongst high income households. As such typically about a third of gross income is saves each year. Consequently, while spending will increase it will not increase at the same rate as gross income. The forecast after allowing for increased taxes (the tax system is progressive by income) and propensity to save by income level results in total expenditure growing slightly slower at 5.0% pa for 2018 to 2023. This compares with 10.2% per annum for the previous 5 years.
The interesting aspect here is the higher income segment (US$25,000 +) In 2013 they accounted for 28% of expenditure of urban households and 11% of households. By 2018 they account for 50% of urban household expenditure and 26% of urban households. Under the GDP growth scenario detailed earlier this income segment is projected to reach 60% of expenditure and 33% of all urban households by 2023. As a segment it grows at 7% per annum in number of households and in terms of expenditure at 9.2% per annum. Clearly that is the segment to focus on for the next 5 years. But this expenditure growth rate is down from 23% pa for the previous five years. The days of hyper growth in the China Consumer market are probably over.
This analysis prepared using Global Demographics Online Database which includes nearly every city, town, township and village in China giving a detailed demographic profile of each and forecasts to 2043. For more information