27th May 2024 – (Beijing) As China grapples with a slowing economy and deflation risks, policymakers are looking for ways to boost domestic consumption and spur economic growth. One key demographic they are targeting is the country’s vast middle class, whose spending habits could make or break China’s economic recovery. However, despite repeated government efforts to loosen household purse strings, China’s middle-class families remain cautious about spending – particularly on big-ticket items like property.

This reluctance to spend is not unique to China. In fact, India faced a similar challenge in the wake of the COVID-19 pandemic. A survey conducted by ET Online found that nearly half of respondents believed that boosting middle-class sentiment would be the best way for the Modi government to mitigate the economic impact of the crisis. The findings highlighted a long-standing issue in India: despite years of lip service from successive governments, little had been done to truly empower middle-class spending.

So what can China learn from India’s experience? The key lies in understanding the root causes of middle-class spending reticence and addressing them head-on.

One major factor holding back middle-class spending in China is a lack of confidence in the economy’s future prospects. After years of breakneck growth, China’s economy is now facing headwinds on multiple fronts – from a property market slump to bleak business sentiment. This uncertainty is causing even relatively affluent Chinese to tighten their belts and save rather than spend.

As one small business owner in Shenzhen put it: “The stock market and real estate are in a slump and almost all kinds of investments are shrinking, no one dares to spend. The economy is not doing well so everyone is worried about the future, so why should I spend money?”

This sentiment is backed up by data. Property sales by floor area fell by 8% year-on-year in the first 11 months of 2023, and by a staggering 32% compared to 2019 levels. While retail sales have rebounded somewhat following the lifting of COVID restrictions, this is largely due to a low base of comparison from last year’s lockdowns.

To truly boost middle-class spending, China needs to address the underlying confidence issue. This means not just talking up the economy’s prospects, but taking concrete steps to stabilise key sectors like property and create a more predictable business environment. It also means providing targeted support to middle-class households, whether through tax breaks, subsidies, or other forms of financial relief.

India’s experience provides some useful pointers in this regard. In the wake of the pandemic, the Modi government rolled out a series of measures aimed specifically at middle-class households. These included an optional new tax regime with lower rates, an extension of the Credit Linked Subsidy Scheme for middle-income housing, and incentives for affordable housing development.

While the impact of these measures is still playing out, they send a clear signal that the government is committed to supporting middle-class spending power. China could take a similar approach, tailoring policies to the specific needs and concerns of its middle-class consumers.

Another lesson China can learn from India is the importance of creating a “positive cycle” in the economy. As Wang Wei, former director of an institute under China’s top policy research body, noted: “Consumption is not about emptying the pockets of consumers; more importantly, it is about fostering a positive cycle among industrial development, increased employment, enhanced income, and consumption.”

In other words, boosting middle-class spending is not just about getting people to buy more stuff. It’s about creating the conditions for sustainable, broad-based economic growth. This means investing in the manufacturing and service industries that create good jobs, as well as the education and training programs that equip workers with the skills they need to thrive in a changing economy.

India has made some progress on this front in recent years, with initiatives like the “Make in India” campaign aimed at boosting domestic manufacturing. China, with its vast industrial base and technological prowess, is well-positioned to take this concept even further – leveraging its strengths to create new engines of growth and employment.

Of course, there are no easy answers or quick fixes when it comes to unlocking middle-class spending power. As Xu Tianchen, senior economist at The Economist Intelligence Unit, notes: “The purchasing power of low-income households will grow as their financial situation recovers. However, leaders must try their best to bridge the widespread ‘confidence gap’ before the rich and the middle class are mentally ready to spend more.”

This is a challenge that will require sustained effort and creative policymaking from China’s leaders. However, if they can successfully tap into the spending potential of the country’s middle class, the rewards could be immense – not just for China’s economy, but for global growth as a whole.

In the end, the key to unlocking middle-class spending in China may lie in a simple yet profound idea: that true economic prosperity is not just about the accumulation of wealth, but about the creation of opportunity. By investing in its people and its future, China can build an economy that works for everyone – and unleash the full potential of its vast and vital middle class.