CHINA will need its cautious consumers to start spending again in order to achieve stronger economic growth, but recent data shows just how difficult that goal may be this year.

The biggest driver of the economy’s 3 per cent growth last year was investment – or gross capital formation – which includes spending on durable assets such as buildings and also business inventory. That reverses the trend seen over most of the last decade, where consumption spending was the fastest growing component of demand for goods and services each year.

On a per person basis, consumption actually fell last year, according to data released on Tuesday (Jan 17) by the National Bureau of Statistics (NBS), as income growth slowed sharply and households saved more. Households added a record 17.8 trillion yuan (S$3.5 trillion) to their bank deposits in 2022.

The pullback in consumer demand can be seen in the restaurant industry, which was hammered by both Covid lockdowns and restrictions earlier in the year and then the rapid spread of infections in December after the country reopened. The accommodation and food sector contracted 5.8 per cent in the final quarter of the year, NBS data showed on Wednesday, exceeded only by the 7.2 per cent slump in the real-estate sector.

That means that the 1 percentage point contribution of consumption to China’s total growth likely came from government spending on services like mass coronavirus testing. Estimates by Bloomberg last year suggested that the cost of repeated mass testing could be close to 1 per cent of gross domestic product (GDP).

Because demand for services comes mainly from households, the slowdown in consumer spending meant China’s service sector shrank as a share of GDP in 2022, while the secondary sector, consisting of manufacturing and construction, increased its share.

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For the whole year, the manufacturing sector value added increased 2.9 per cent, while the construction sector’s output grew 5.5 per cent. The fastest growing sector was IT and software, up 9.1 per cent.

Economists expect consumption to be the main driver of GDP this year, but the data showed a slowdown in urbanisation and rise in inequality in 2022, two trends which could slow private spending. People moving from rural areas to cities where they can find more productive employment is a crucial driver of economic growth in China, and is even more important now that the population is shrinking.

There were almost 172 million people registered as living in rural areas but working temporarily in cities at the end of 2022, more than 2 million fewer than at the end of 2019, before the pandemic. It remains to be seen if the fall in the rate of urbanisation is a short-term result of Covid controls limiting mobility, or a longer-term shift that will slow the economy.

Beijing doesn’t appear to be making much progress in tackling inequality. High inequality isn’t just a potential source of social unrest but it can also limit consumption growth as wealthier people tend to save more of their incomes. China’s official data shows a widening gap between the top 20 per cent of the population by income and the bottom 20 per cent, a widely used measure of inequality. The former group earn on average more than 10 times the latter’s income.

The gap between those groups in China is well above the most recent data for developed countries such as the US and South Korea compiled by the Organisation for Economic Co-operation and Development. China’s ratio is also above recent figures for developing countries such as Mexico, where the ratio was similar to China’s in 2016 but has since fallen.

Despite the deep slump in property construction and the outright fall in household spending last year the economy grew 3 per cent, with the record goods trade surplus contributing half a percentage point to growth and a huge infrastructure push worth nearly 6 per cent of 2022 GDP making a difference.

Fixed-asset investment in infrastructure grew 9.4 per cent in 2022, the fastest pace since 2017, while manufacturing investment rose 9.1 per cent. That helped compensate for the 10 per cent decline in completed investment in real estate, the first time it’s fallen for a whole year. BLOOMBERG