China’s rough path towards consumption-led growth

China’s rough path towards consumption-led growth
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To stimulate domestic consumption, China passed a major amendment to its consumer protection law on 25 October 2013. This move benefits consumers and some industries such as e-commerce. However, its impact on consumption increase may be small.

On 25 October, Standing Committee of the PRC National People’s Congress passed new amendments to the Law on the Protection of Consumer Rights and Interests. Strangely, the public and media did not spend too much time celebrating. They certainly should. The new law will provide better protection for millions of Chinese consumers. Its potential impact on different industries and China’s consumption level, however, is not as straightforward.

This was the first major overhaul of China’s consumer protection law since its inception in 1993. The amendments focused on four issue areas, which all aim to benefit consumers. To begin with, the new law stipulates that consumers have the “right to regret” and get a refund within seven days of making an online purchase. Second, to cap the cost of consumers enjoying their rights, sellers will bear the burden of proof in more circumstances. Heavier fines also await those who break the new law. Lastly, the role of the China Consumers’ Association (CCA), which represents groups of consumers in any wider class actions against retailers, will be enhanced.

Consumers should not be the only ones applauding these amendments. Improved institutional infrastructure leads to more business. For example, e-commerce companies, with increased credibility due to the new law, are expected to see a surge in online sales. According to CCA, complaints on internet purchases accounted for 52.4% of China’s total sales disputes in 2012. Thus, there has been a generally low level of trust among consumers with regard to online purchases, keeping some away from buying expensive products online. Better consumer protection provides much needed trust building for the e-commerce sector.

As with its effect on the e-commerce industry, the amendments are designed to boost consumer confidence and stimulate China’s domestic consumer spending, part of China’s ambition to steer away from investment-led growth. Jia Dongming, head of the working committee responsible for the new law, believes that “strengthening consumer confidence will benefit the whole nation’s economic development and boost domestic demand.”

Unfortunately, the consumer protection law is a relatively minor contributing factor to the overall consumption level. First, the new amendments have uneven impacts on different sectors. A win for online sales may mean a loss for traditional retailers. The seller’s burden of proof is also applied to only a few products such as computers, air conditioning and automobiles. Specifying industries and products in the law allows benefits to be distributed along sector lines. Therefore, the envisioned gains face dilution to a certain extent. Second, other factors such as social security, healthcare and tax rates are key to boosting consumption in China, as mentioned in a McKinsey interview. Reforms of the first two are underway, though they are riddled with all sorts of problems.

World Bank Graphic

Figure 1: Household final consumption expenditure (% of GDP) (Source: World Back)

Stronger prescriptions are needed, if China is to raise its current sluggish household consumption level (see figure 1). Nonetheless, it is reassuring to know the new consumer protection law would do more good than harm, if executed properly.

Categories: Asia Pacific, Economics

About Author

Roger Yu Du

Roger works for a strategic advisory group that provides services to investors focused on Asia. He holds a master’s in International Political Economy from the London School of Economics and received his BA in International Relations from Fudan University in China, with a focus on East Asian affairs.