China’s Faltering Growth Revives Discussion of Cash Vouchers

By Kevin Yao and Ellen Zhang

BEIJING – A new wave of disappointing economic data from China is intensifying calls for the government to increase fiscal measures and potentially offer shopping vouchers to steer growth towards the annual target of approximately 5%.

Following a poor performance in the second quarter, the world’s second-largest economy showed signs of further slowing in July. Newly released figures indicate that home prices have declined at the steepest rate in nine years, industrial output has decreased, and both export and investment growth have tapered off, while unemployment has risen.

While some data exceeded expectations, the reasons were concerning: the increase in inflation was linked to adverse weather rather than higher domestic demand, a surge in imports was driven by preemptive chip purchases ahead of anticipated U.S. technology restrictions, and a modest rise in retail sales was influenced by low figures from the previous year.

These trends present a troubling scenario for policymakers, who may be forced to amplify stimulus efforts or face the reality of slower growth coupled with a potential decline in consumer and business confidence.

Carlos Casanova, an economist at UBP, stated, "The current economic performance remains behind target, necessitating immediate and significant policy intervention." He suggested that the government might need to widen the budget deficit to 4% of GDP from the currently planned 3%.

One policy advisor, who preferred to remain unnamed, indicated that if there were no signs of economic stabilization by October, the government might accelerate the issuance of bonds allocated for next year.

The advisor warned, "Otherwise, the economic outlook will appear grim, and hitting the 5% target will be unfeasible."

In a similar move last October, authorities raised the deficit target to 3.8% of GDP and advanced part of the next year’s local government debt quotas for investments in flood prevention and infrastructure projects.

What could differ from last year’s strategy is the allocation of the additional funds. Historically, increasing infrastructure spending has produced diminishing returns after decades of investment. Simultaneously, reliance on advanced manufacturing for growth is stirring trade tensions and raising concerns about overcapacity and deflation at the factory level.

Analysts from Societe Generale expressed that "The Chinese economy, considering its size, cannot rely solely on manufacturing and exports." They added that to achieve the 5% growth target, if that remains the goal, authorities need to bolster support for domestic demand.

VOUCHER DISCUSSIONS REEMERGE

As household spending tightens, major e-commerce players in China have resorted to aggressive discounting and promotions to attract buyers, which has pressured profit margins throughout the retail sector.

Alibaba Group Holding recently reported revenue figures that fell short of market expectations, highlighting the challenges facing domestic e-commerce amid cautious consumer spending.

A high-level policy meeting held in July indicated a shift toward consumer-focused stimulus, acknowledging that previous strategies were not yielding desired results.

Recent state media reports revived the concept of consumer support measures akin to those implemented in other countries during the pandemic, but typically not endorsed by Chinese officials.

A report suggested that the government "should consider additional direct support to consumers worth at least 1 trillion yuan (approximately $139 billion)—either through cash or vouchers," which would represent about 0.8% of last year’s GDP.

This kind of action "would necessitate an increase in this year’s deficit ratio or approval for additional special treasury bonds," the report stated. Li Daokui, of Tsinghua University, was cited saying that it would be wise to issue these vouchers during China’s National Day holiday in October.

However, many economists remain doubtful that such measures will be implemented, given historical resistance. In past crises, officials tended to support businesses while leaving consumers to navigate challenges on their own.

Xing Zhaopeng, a senior strategist at ANZ, commented that vouchers would provide only temporary relief and that sustained consumption growth hinges on the recovery of the struggling property market and stock prices.

He noted that household wealth from property values has plummeted by 20%-30% from a peak of 600 trillion yuan, a decrease roughly equivalent to the entire annual GDP of China.

"People will spend the money from the vouchers in the month they receive them," Xing said. "Only improvements in property and stock prices can drive ongoing consumer spending."