China’s Consumption Recovery: the Role of High Savings
In 2022，China’s total retail sales fell 0.2% year on year，the second year of negative growth since 1969 (the last time was 2020 when COVID-19 broke out)，while household savings deposits rose sharply by 17.8 trillion yuan，almost 8 trillion yuan more than in 2021，a record high. Policymakers want a targeted solution to insufficient demand. "Using consumption as a lever to accelerate economic recovery" has sparked a heated debate on whether high savings can drive consumption recovery.
Predicting the consumption trend this year depends on two key factors: income growth and the wealth effect. Regarding the latter，in my view，the high savings accumulated by Chinese households in 2022 were due to the decline in new home sales，a shift from wealth management products to deposits，and lower consumer spending，so there is still uncertainty about whether a reduction of savings will boost consumption this year. Moreover，analysis of the wealth effect cannot focus only on the change in household savings，but also on broad change in household balance sheet.
In terms of the main components of the household balance sheet，if policymakers actively promote the gradual stabilization of the property market，the recovery of the capital market and the accelerated improvement of the social security system in 2023，the wealth effect of the household sector will emerge and，combined with the release of the high savings accumulated in recent years，there will be greater potential for China’s consumption recovery. Of course，this still requires employment and income growth.
Three major factors have driven significant growth in household savings
In 2022，China’s various deposit balances increased by 26 trillion yuan. Among them，household savings deposits increased significantly by 17.8 trillion yuan，almost 8 trillion yuan higher than in 2021，accounting for 68% of the annual increase in deposits; in contrast，corporate and institutional deposits increased by 5.0 trillion yuan and 1.8 trillion yuan respectively，not significantly higher than in previous years，and fiscal deposits decreased by 37.6 billion yuan. There are several sources of higher household savings，such as income growth，lower consumption expenditure and investment expenditure. Identifying sources will help determine whether excess savings can drive a rebound in consumption in 2023.
The significant decline in home purchase spending is the main reason for the increase in household savings. Weighed down by factors such as developer defaults and low confidence，residential property sales in 2022 were only 11.7 trillion yuan，down by 28.3% year on year. Based on average year-on-year residential sales over the past three years，residential sales last year were about 6.0 trillion yuan below trend，and if the 40% down payment ratio is applied，the decline in home purchase expenditure brings at least about 2.4 trillion yuan in increased savings.
The shift from financial assets such as wealth management products to deposits was also an important source of the increase in household savings. Due to increased volatility and lower yields in the stock and bond markets，households redeemed financial products such as wealth management products and mutual funds，leading to a return of funds to deposits. As of the first half of 2022，the balance of banks' wealth management products was 29.2 trillion yuan，up slightly from the beginning of the year，and redemptions increased in the second half of the year. By the end of the third quarter，the size of the wealth management business was 68.3 trillion yuan，up only 0.5 trillion yuan from the beginning of the year，significantly lower than the increase in the same period of the previous three years.
In addition，the impact of falling consumer spending on rising household savings is significant. In 2022，national per capita disposable income grew by 5.0%，while per capita consumption expenditure grew by only 1.8%，indicating a significant increase in the propensity to save last year. The impact of the dynamic zero-COVID strategy on offline consumption is significant. In addition，the property downturn has also depressed consumption related to the purchase of new homes，such as spending on household appliances，renovations and furniture. The People's Bank of China (PBC) survey data also show that households' propensity to save is at its highest level since the data became available.
In summary，the release of high savings in 2022 will play a role in boosting consumption this year，but there is also greater uncertainty. First，the supply and demand of real estate are facing multiple difficulties，and the process of stabilizing and recovering the housing market in 2023 will not be too fast. Second，savings generated by the redemption of financial assets such as wealth management products may not have been intended for consumption in the first place，and once released，they will flow into the capital market. Finally，the only way to boost consumer confidence is to allow them to spend more of their income on consumption.
Wealth effect on consumption depends more on the balance sheet
Moreover，the household balance sheet can provide a comprehensive picture of the structure of household wealth，which helps to identify the source of consumption growth. In the post-pandemic period，the US household balance sheet was greatly expanded with fiscal subsidies，which contributed to a strong recovery in consumption and fully reflected the wealth effect on consumption. However，compared with the US situation，the following three structural differences in China’s household balance sheet and their implications for the recovery in consumption deserve more attention.
Property accounts for far more of Chinese household wealth than in the US; the property downturn constrains consumption growth
Real estate accounts for an extremely high proportion of Chinese household assets，which indicates that the property market has a huge impact on household wealth. According to data from the National Balance Sheet of the Chinese Academy of Social Sciences，as of 2019，Chinese household real estate assets were as high as 232 trillion yuan，accounting for about 40% of total household assets. Meanwhile，the results of the PBC’s 2019 survey on the assets and liabilities of Chinese urban households also show that the share of urban household real estate assets in total household assets is closer to 60%. By contrast，US household real estate assets amounted to US$38 trillion in 2021，accounting for only 24% of total household assets，far below the Chinese level.
Since the second half of 2021，the deep correction in China’s property market has had a significant impact on household consumption through the wealth effect. As of December 2022，the price index of newly built residential properties in 70 large and medium-sized cities had negative growths for nine consecutive months，and the price index of second-hand residential properties had been dec