China’s on-budget fiscal support for consumption in H2 to step up. While near-term impact may be subject to household sentiment, the approach looks more sustainable. 15th Five-Year Plan likely to announce more polices to support households and rebalance the economy, Standard Chartered's economists Carol Liao and Hunter Chan report.

More sustainable approach to support consumption

"China recently introduced new policies to support child care, elderly care, consumption and services, as well as strengthen the social security system. This aligns with the government’s increasing focus on supporting households since last year. As the effectiveness of the goods trade-in scheme is likely to fade over time, we expect these new policies to be continued in the coming years and possibly expanded, providing more sustainable support for consumption."

"Retail sales decelerated recently but may stabilise soon with resumed policy support. We estimate fiscal subsidies for these new initiatives at a total CNY 120-150bn; these are likely to be funded by the fiscal budget. These support measures may be enhanced further in the upcoming 15th Five-Year Plan to address challenges faced by China’s rapidly ageing population."

"While China has expanded social security coverage to over 90% of the total population in the past decade, the per capita benefit remains inadequate and uneven compared with global peers. Due to implementation and other legacy issues, annual social security collections are insufficient to cover the expenses of benefits, leading to overreliance on fiscal subsidies. With a plummeting birth rate and a past-peak working-age population, there are challenges to the sustainability of the current social security system. The lack of a social security safety net is likely the root cause of over-saving and the supply-demand imbalance, which is reflected in the sustained large current account surplus, creating downward pressure on growth and inflation. Increasing fiscal support to households and improving the social security net are key to rebalancing the economy and transitioning to a more sustainable growth path, in our view."