Why is China paying its people to shop?

Hello folks, your tune into Finshaut's Daily, I'm Sad. In today's episode, we look at how the Chinese government is subsidizing purchases of smartphones, electric cars, and other goods to boost domestic demand. And whether this can solve China's deeper economic problem. Before we head to the story, here's a quick word from Team Ditto. We're hosting a free two-day insurance masterclass that helps you build real financial security by understanding health and life insurance the right way. Right from understanding how to protect your family, choosing the right cover amount, and knowing what truly matters during a claim to how hospitals process claims, the mistakes buyers usually make, and how to choose a policy that won't disappoint you when you needed the most. We will explain it all in plain language. Head to the link in the description and say your spot. Now to the story. Something strange is playing out in China right now. The Chinese government is subsidizing purchases of everything from smartphones to electric cars because it wants people to spend more. Yup, you read that right. It's called a national trade-in program. And besides subsidizing purchases of appliances and electronics, it also covers the refurbishment of old residential communities, elderly care institutions, and commercial complexes. For this, the government has set aside 250 billion yuan this year. And this isn't something new. China has been running the program since 2024. Last year, for instance, it spent 300 billion yuan on it, helping drive retail sales of consumer goods up by 0.6% to 2.6 trillion yuan. Including the 2024 program, these initiatives have generated sales worth 3.92 trillion yuan so far. But why is the world's manufacturing powerhouse persuading its own citizens to buy things you ask? Well, it all goes back to the pandemic. Chinese households went through some of the world's longest pandemic lockdowns. If you remember, China had something called the Zero COVID Policy. Even as Western countries rolled out vaccines and returned to normal life, China continued imposing sweeping lockdowns well into 2022. This took a toll on an economy that had relied heavily on factories, infrastructure, and exports for years. And if that wasn't enough, in late 2020, Chinese regulators introduced strict debt limits known as the Three Red Lines. That's because property developers had been borrowing heavily to build more homes than people actually needed, creating the makings of a housing bubble. But when regulators tried to hit the brakes, they effectively restricted access to fresh credit for heavily indebted developers. Major players, most notably China's Evergrande Group, which had accumulated over 300 billion dollars in liabilities, soon faced severe cash crunches and defaulted on their debts in 2021. This triggered a domino effect across the property sector. Naturally, home buyers began to panic. What if they bought a home and the developer went bust before completing the project? Home sales plunged and property prices fell along with them. And that's a big problem, because nearly 70% of household wealth in China is tied to property. So when home prices fell, families saw their wealth shrink too. Many had bought homes, assuming they could sell them later to fund their children's education or their own retirement. Now that option looked a lot less reliable. They would have to save more to meet those expenses. Add to this a declining working age population, a rapidly aging society and youth unemployment that touched 20% in 2023. Put all of this together and you can see why Chinese households would rather save for the future than splurge on eating out, buying a new phone or taking a holiday. It also explains why household consumption accounts for only around 40% of China's GDP. Sure, that's slightly higher than the 35% recorded in 2010. But it's still much lower than the 60% average in many other major economies. And when people spend less, businesses sell less. Companies then cut production and hire fewer workers. That makes households even more nervous about their finances, encouraging them to save even more. It's a vicious cycle. And with household spending remaining weak, China became even more reliant on its tried and tested model of investment, manufacturing and exports to drive growth. But then, relying on investment and overseas demand indefinitely could be risky. It leaves the country exposed to slowing overseas demand and trade barriers. Years of investment have also created excess capacity in industries such as electric vehicles, batteries and solar panels. In simple terms, factories are producing more goods than the market can comfortably absorb. And everyone produces more than customers want to buy, companies end up competing on price, squeezing their profits. So its factories simply need a more dependable source of customers. And a stronger domestic market could provide one. That's why Beijing wants its citizens to open their wallets. But can discounts really solve China's problems? Well, at the beginning of this story, we told you how the trade in programs had helped boost retail sales. So you might think they're actually working. But here's the thing. Of course, someone offers you a discount to buy a smartphone today. You might decide to buy it immediately, even if you'd originally planned to purchase one six months later. But when those six months arrive, you won't need another phone. You've already bought one. And if millions of people do this, the result is simply that purchases get brought forward. Retail sales rise temporarily, but there's no guarantee of additional spending over the long term. Economists call this the pull-forward effect. That's the problem China has been facing too. Some are spending declined in May this year for the first time in more than three years. Besides, discounts can make purchases cheaper and encourage some people to buy things they might otherwise have put off. But they do little to address the financial worries that make households reluctant to spend in the first place. So the trade-in program is, at best, a temporary boost. And the real cure might come only when China addresses its deeper economic problems. For starters, perhaps the program itself needs a makeover. Instead of focusing mainly on big ticket goods that people buy once every few years, the government could give households more flexibility to spend on everyday needs, including entertainment and eating out. There's some evidence that this could help. The International Monetary Fund estimates that doubling social spending in rural areas could raise China's consumption to GDP ratio by 1.8% over the medium term. But the government can't keep subsidizing purchases indefinitely. For people to continue opening their wallets, they need something more important, a reliable financial safety net. China does have a social security system, but its coverage and benefits remain uneven. And that means many households still have to save heavily for healthcare, education and retirement. In fact, a 2019 report by the Chinese Academy of Social Sciences warned that the National Social Security Fund established in 2000 to help finance future pension obligations could face depletion by 2035. Strengthening its social safety net would also mean spending more on public services, such as healthcare and education. The catch is that this would require higher taxes or more government borrowing, neither of which may be an easy political or economic choice. Ultimately, China needs to make household consumption a stronger pillar of its economy, rather than relying so heavily on manufacturing, investment and exports. If families don't have to save so much for every possible emergency, they'll have more room to spend on the things they actually want. These reforms won't happen overnight, so China will have to make the transition gradually. After all, its problem is much bigger than getting people to shop during a sale. For now, discounts can buy Beijing sometime. What it does with that time, will determine whether the shopping spree lasts beyond the next sale. Thank you so much for tuning in folks, I'll see you soon.