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Prof. Zhao Bo: Consumption and Asset Prices during the Pandemic

Dec 13-2022   



Chinese residents’ consumption has experienced wilder fluctuations during the pandemic, which has led to heightened risks of violent oscillations in asset prices, said Prof. Zhao Bo in the recent China Economic Observer, a forum by the NSD.

 

Before the pandemic, the ratio between average consumption and average disposable income, including those of both rural and urban residents, was at around 67.5%. When the first wave of the Delta virus spread across China, consumption dropped significantly and household savings quickly went up by about 5%. As the pandemic loosened its grip, the ratio kept edging up, until the Omicron strain sent the ratio to its second trough in the pandemic.

 

Prof. Zhao said that the fluctuations in consumption might be accounted for in four ways: income fluctuations that bear on consumption; pandemic controls that limit access to some consumption venues; change in future expectations that affects current consumption decisions; and change in asset prices that influences consumption.

 

While combing through all four explanations, he highlighted the third one by pointing out that Omicron has caused 1/3 decrease in consumer confidence, much higher than the 10% drop induced by the Delta strain. In other words, consumers have demonstrated extreme pessimism about the future. A survey by the central bank found that people’s confidence in future income plunged to the same level when the pandemic first broke out in 2020. Consequently, the consumers prefer saving for rainy days to spending, and policy stimulations can only have limited effects, said Prof. Zhao.

 

As for the fourth explanation, stock market returns have shown a high positive correlation with average consumption growth rate, so when share prices come down, not only will consumption take a beating, but investors will sell off their holdings, which pulls share prices further down. Disruptions to the real estate market have also inhibited consumption, though to a lesser extent than declining stock returns. The good news is consumption has tremendous room to bounce back in the mid and long time, if the predictive power of treasury bond yields is to be trusted, said Prof. Zhao.

 

Prof. Zhao advocated more attention to consumption fluctuations, and advised that local governments follow the new pandemic control guideline and take proactive measures to stabilize consumption and reduce the inhibitive effects of pandemic controls on consumption, which will help put economic growth and asset prices on the right track in the next two years.

 

 

Prof. Zhao Bo: Consumption and Asset Prices during the Pandemic

Dec 13-2022   



Chinese residents’ consumption has experienced wilder fluctuations during the pandemic, which has led to heightened risks of violent oscillations in asset prices, said Prof. Zhao Bo in the recent China Economic Observer, a forum by the NSD.

 

Before the pandemic, the ratio between average consumption and average disposable income, including those of both rural and urban residents, was at around 67.5%. When the first wave of the Delta virus spread across China, consumption dropped significantly and household savings quickly went up by about 5%. As the pandemic loosened its grip, the ratio kept edging up, until the Omicron strain sent the ratio to its second trough in the pandemic.

 

Prof. Zhao said that the fluctuations in consumption might be accounted for in four ways: income fluctuations that bear on consumption; pandemic controls that limit access to some consumption venues; change in future expectations that affects current consumption decisions; and change in asset prices that influences consumption.

 

While combing through all four explanations, he highlighted the third one by pointing out that Omicron has caused 1/3 decrease in consumer confidence, much higher than the 10% drop induced by the Delta strain. In other words, consumers have demonstrated extreme pessimism about the future. A survey by the central bank found that people’s confidence in future income plunged to the same level when the pandemic first broke out in 2020. Consequently, the consumers prefer saving for rainy days to spending, and policy stimulations can only have limited effects, said Prof. Zhao.

 

As for the fourth explanation, stock market returns have shown a high positive correlation with average consumption growth rate, so when share prices come down, not only will consumption take a beating, but investors will sell off their holdings, which pulls share prices further down. Disruptions to the real estate market have also inhibited consumption, though to a lesser extent than declining stock returns. The good news is consumption has tremendous room to bounce back in the mid and long time, if the predictive power of treasury bond yields is to be trusted, said Prof. Zhao.

 

Prof. Zhao advocated more attention to consumption fluctuations, and advised that local governments follow the new pandemic control guideline and take proactive measures to stabilize consumption and reduce the inhibitive effects of pandemic controls on consumption, which will help put economic growth and asset prices on the right track in the next two years.