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Decrease In Consumer Spending Threatens China’s Economy

Published: August 7, 2021
CHENGDU, CHINA - JUNE 18: A jewelry vendor is seen on West Yulin Road on June 18, 2020 in central Chengdu, China. Street vendors in the tourism city Chengdu are mentioned by Chinese Premier Li Keqiang during COVID-19 as an example of economic recovery.
CHENGDU, CHINA - JUNE 18: A jewelry vendor is seen on West Yulin Road on June 18, 2020 in central Chengdu, China. Street vendors in the tourism city Chengdu are mentioned by Chinese Premier Li Keqiang during COVID-19 as an example of economic recovery. (Image: Yuyang Liu/Getty Images)

Weak domestic consumption — largely attributed to the impact of the COVID-19 virus — is having devastating consequences for scores of micro and small enterprises (MSEs) in China. It’s impacting the livelihoods of many Chinese and is threatening to upend a sputtering national economy. 

China’s small businesses are failing under the impact of intermittent lock-downs and other lock-down measures. The lock-downs are hollowing out business sectors, disrupting supply chains, and putting the national economy at high risk.

According to the most recent data available, China has upwards of 44 million MSEs that generate incomes of up to 3 million yuan (US$464,000) per year. Ninety million people declare themselves as self-employed individuals.  

The economic activity generated by these self-employed individuals and MSEs forms the backbone of the Chinese economy and private sector. In the coming months, the outlook for them is not good. 

Analysts expect retail consumption to remain weak in the next several months. They expect a lack of income growth and a continuation of cautious spending habits that emerged in the face of the pandemic. 

In addition, small businesses, particularly small manufacturing and industrial firms, have been impacted by the ballooning cost of labor and raw materials. Many small businesses are also having trouble securing loans. When they do, the cost of borrowing is high. 

Small businesses closing shop

Many businesses are planning on either shrinking their size or closing their doors altogether.

South China Morning Post (SCMP) interviewed Wen Tao, a small business owner who runs a snack shop in one of Shenzhen’s busiest malls. 

Wen Tao said, “Since the beginning of 2020, I have been losing 4,000 to 5,000 yuan (US$620-US$775) every month, and I’ve cut the number of my employees from five in 2019 to just one now… What I’m going to do is close the business in September when the lease ends, instead of borrowing money to continue operating. I’d just lose more money, because I don’t see any sign of consumption recovering in the short term.”

The mall Wen does business out of is located in one of the more crowded business areas in Shenzhen. Historically, high commercial vacancy rates have eliminated the foot traffic his and other businesses relied upon, hollowing out the mall he operates from. 

“The vacancy rate for food and beverage businesses at the shopping centre in Nanshan district, Shenzhen, where Wen’s shop is located, has gone from less than 10 per cent at the end of 2019 to more than 40 per cent now,” SCMP reported. 

Wen’s story is by far not an isolated one. Many small businesses in China are facing the same problems during the second half of the year.

Commercial vacancy rates skyrocket

The average vacancy rate for office buildings in Shenzhen has reached 26.4 percent according to second-quarter data from Savills, a leading real estate firm. In Qianhai, commercial development in Shenzhen, Guangdong province, commercial vacancy rates have surpassed a staggering 50 percent. 

Qianhai is a 15-square-kilometer (5.8-square-mile) strip of land located in western Shenzhen. It is being jointly developed by Hong Kong and Shenzhen as a “modern service industries cooperation zone” under a State Council plan. 

The failure of this real estate development, located in the heart of one of China’s leading tech sectors, illustrates pressures the Chinese economy is under. 

Unequal footing

Large firms and state-owned enterprises recovered considerably during the first half of 2021.  However, MSEs and self-employed people are not seeing anywhere near the growth required to sustain their incomes and businesses, creating an uneven playing field.

Huang Weijie, a garment producer, told SCMP, “New infrastructure investment and those emerging industries that have been strongly supported by authorities have nothing to do with us. In the past, the government encouraged private enterprises to get rich first and provide other people with employment and prosperity. Now, only state-back sectors have adequate liquidity and profits.”

During the first quarter of 2021, the average profits for MSEs were approximately 109,000 yuan (US$16,900). That was up from 105,000 yuan in the third quarter of 2020 but much lower than 124,000 yuan in the fourth quarter of 2020. That’s according to an online survey of MSEs conducted by Peking University’s Centre for Enterprise research. 

In stark contrast, major industrial firms with annual revenues exceeding 20 million yuan experienced an increase in profits of an average of 83.4 percent during the first 5 months of 2021. 

In June, Chinese Premier Li Keqiang issued a call-to-action to amend fiscal and monetary policies. He promised to focus on bolstering the real economy with an emphasis on supporting SMEs and other labor-intensive industries. But nothing has materialized in any significant way.

“This year, as part of the support to China’s legions of small taxpayers – including caterers, street vendors, travel agents and transport firms – the value-added tax (VAT) threshold will be raised from 100,000 yuan (US$15,400) to 150,000 yuan of monthly sales,” SCMP reported.

While amending the threshold for the VAT lightens the tax burden on SMEs, this initiative appears to have done little to bring back consumers. 

China must remove lock-down measures and Beijing must take real, meaningful action. If action isn’t taken, the communist regime will continue to shed the foundations of its economy. Most assume it will result in the further degradation of the circumstances under which millions of Chinese live.