China’s Wide Income Gap Undercut Spending as Growth Recovers

China’s successful control of Covid-19 made it the only major economy to have grown last year, but wide income inequality and still weak consumer spending reflects an unbalanced recovery.

Here’s a deeper look at some of the data published alongside the gross domestic product report this week:

Income Gap

Official figures released on Monday which showed that the economy’s growth rate surpassed pre-pandemic levels in the last quarter also revealed that the richest 20% of Chinese had an average disposable income of more than 80,000 yuan ($12,000) last year, 10.2 times what the poorest 20% earn.

The multiple in the U.S. is about 8.4 and closer to 5 in Western European countries such as Germany and France, according to data from the Organisation for Economic Co-operation and Development. By this measure, China’s inequality levels are comparable with Mexico, where the top 20% earn 10.4 times the bottom 20%.

China’s Wide Income Gap Undercut Spending as Growth Recovers

President Xi Jinping has flagged the country’s unequal income distribution as a threat to its future growth, with officials considering more redistributive policies to encourage household spending.

While inequality didn’t surge in China due to the pandemic, the data showed officials have made little headway in reducing it, with the income gap remaining largely stable since 2015.

Weak Consumption

The full-year 2020 data also showed that even though China’s suppression of the virus allowed normal economic activities to resume by the second half of the year, growth in household spending has yet to return to pre-pandemic levels.

China’s per-capita consumption, after adjusting for inflation, dropped 4% in 2020. That’s comparable with forecasts for U.S. personal consumption spending, which is projected to have fallen 3.8% in 2020, according to a Bloomberg survey.

Retail sales declined 3.9% in 2020 from the previous year, a steeper fall than in developed economies such as the U.S., where government payments to workers stuck at home and unemployed supported spending on consumer goods.

In common with other economies, China’s spending on services suffered more than spending on goods due to closures and fear of the virus, with an almost 17% drop in spending at restaurants last year.

China’s Wide Income Gap Undercut Spending as Growth Recovers

The full-year figures mostly reflect a downturn in the first half. Consumer spending measures returned to growth by May, once the spread of Covid-19 was effectively suppressed.

Retail sales registered 4.6% year-on-year growth in December, but remains below pre-pandemic rates of around 8%. Economists offered two explanations: a weak job market and more precautionary saving.

Millions of migrant workers lost their jobs early in 2020 as factories, shops and restaurants were shuttered to contain the virus. When lockdowns were lifted later in the spring, some chose to remain in their rural hometowns, with official data showing the number of migrant workers declining by 5.2 million in 2020 from 2019.

China offered relatively little direct support to households hit by job-losses in the first quarter, meaning many had to rely on savings that they are now trying to replenish.

“Right now, Chinese households still save three percentage points more of their income than pre-Covid,” according to Houze Song, a researcher on China’s economy at the Paulson Institute.

Industry Surges

China’s industrial economy hit new records in 2020. Crude steel output rose above 1 billion tons for the first time, and the production of rolled steel and aluminum also surged as investment in real-estate and infrastructure climbed.

China’s Wide Income Gap Undercut Spending as Growth Recovers

For the full year, the industrial sector, which includes manufacturing and construction, grew 2.6%, outpacing the expansion of GDP. By contrast, service-sector growth reached 2.1%, with information technology and finance being bright spots.

Read More: China’s Fourth Quarter Gross Domestic Product: Details (Table)

Spending in restaurants and accommodation, such as hotels, increased 2.7% in the final three months of 2020 after declining in the previous three quarters.

China’s Wide Income Gap Undercut Spending as Growth Recovers

Government Support

Weak private spending meant the share of consumption in China’s GDP declined last year, contrary to Beijing’s longer-term aim to create a more consumer-driven economy.

China’s Wide Income Gap Undercut Spending as Growth Recovers

However, the decline was less dramatic than some expected, with the share of final consumption in GDP down just 1.4% from 2019, according to Ning Jizhe, the head of China’s statistics bureau. That may be due to increased government spending on consumption goods and services, as Beijing loosened controls on government debt to encourage economic expansion.

Final consumption expenditure subtracted 0.5 percentage point from GDP growth in 2020. In 2019, it added 3.5 points to the expansion.

Housing Investment

Investment in housing helped to support China’s recovery last year, but with Beijing planning to reduce the real estate sector’s access to credit in 2021, that may start to wane. Fixed asset investment in real estate climbed 7% in 2020, compared to a gain of 0.9% for infrastructure, according to official data.

China’s Wide Income Gap Undercut Spending as Growth Recovers

Manufacturing investment declined 2.2%, suggesting that many businesses are reluctant to expand while the global economy continues to struggle with the pandemic. Sectors which have seen a surge in exports were an exception, with investment in the manufacturing of pharmaceuticals and computers and office devices growing by 28% and 22% respectively.

©2021 Bloomberg L.P.

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