Commentary on Political Economy

Monday 22 April 2024


China Wants Everyone to Trade In Their Old Cars, Fridges to Help Save Its Economy

    A community event of exchanging old appliances for new ones in Shandong province in March 2024.
    A community event of exchanging old appliances for new ones in Shandong province in March 2024.Photographer: CFOTO/Future Publishing/Getty Images
    By Bloomberg News


    China’s world-beating electric vehicle industry, at the heart of growing trade tensions with the US and Europe, is set to receive a big boost from the government’s latest effort to accelerate growth.

    That’s one takeaway from what Beijing has revealed about its plan for incentives that will encourage Chinese businesses and households to adopt cleaner technologies. It’s widely expected to be one of this year’s main stimulus programs, though question-marks remain — including how much the government will spend.

    Four months after President Xi Jinping flagged a proposal to help households and businesses upgrade old machinery, details are still trickling out. At a briefing earlier this month officials from multiple departments announced the fullest version so far, and promised more to come.

    How Much Extra Demand From Trade-Ins, Upgrades?

    Goldman Sachs economists used similar Chinese programs of the past to estimate what take-up by households and businesses might be this year

    Source: Goldman Sachs, March 2024

    Trade-ins have the potential to speed up growth, currently forecast to fall a bit short of China’s target of about 5%. They can also make it less lopsided, by encouraging purchases at home to balance an export drive. That could ease some of the global concern about overcapacity in China’s factories.

    Local governments will be in charge of many practicalities. The city of Suzhou, in China’s wealthy Jiangsu province, already began — announcing subsidies worth 100 million yuan for cars (up to 6,000 yuan per buyer) and 20 million for appliances (a maximum 1,500 yuan for each machine) starting April 20.

    Here is what Beijing has announced and what investors are waiting to find out:

    1. What is China’s trade-in plan?

    The sweeping program aims to upgrade China’s stock of industrial and household equipment – taking older machines that use more energy or emit more pollution out of service, and giving a lift to consumer spending and business investment along the way.

    It covers everything from heavy industries like petrochemicals and steel, to installing new elevators in apartment buildings, to incentives for consumers to scrap their old washing machines and buy new ones that use less water.

    China’s top economic planning agency says investment on equipment upgrades in key industries was 4.9 trillion yuan ($680 billion) last year, and the goal is a 25% increase by 2027.

    2. How much will China’s latest stimulus plan cost?

    Beijing hasn’t specified how much cash it’s ready to provide, though officials have described some of the financing tools.

    On the household side, auto trade-ins look set to be the focus of fiscal support from the central government. Subsidies will be offered to consumers who buy new EVs or other energy-conserving cars. Local authorities will share some of the costs.

    For appliance upgrades regional governments — at least, the ones that aren’t too deep in debt trouble — are expected to shoulder all the burden, signaling it’s a lower priority for Beijing.

    China Auto Market Booms, Appliances Hit by Property Slump

    Monthly sales in yuan (1-year moving average)

    Source: National Bureau of Statistics

    Note: Data excludes Jan/Feb period where monthly numbers aren't published

    For industry there’ll be a mix of subsidies, government investment in new equipment, tax breaks for cleaner producers and discounted loans to help firms upgrade.

    There are sticks as well as carrots. New environmental standards for machinery “will force companies to get rid of some old equipment,” says Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc, calling that “the most distinctive feature” of the plan.

    3. How will the program help speed up China’s growth?

    Much of the spending may fall within existing budget proposals, and its impact is likely built into the official growth target, says Ding. “I don’t think it will lead to additional fiscal stimulus,” he adds, though it “will provide the government with more channels to fully spend” money already set aside.

    As for the extra consumer and business spending it will trigger, that’s hard to specify without the financing details, says Duncan Wrigley at Pantheon Economics. For now he’s estimating a total around 0.7 percentage point of China’s gross domestic product.

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    Economists at Citigroup Inc. said in a note that trade-ins under the plan could boost retail sales by about 0.5% this year, while equipment upgrades could increase China’s widest measure of investment by 0.4 percentage points through 2027. Last month, Goldman Sachs economists estimated a 0.6 percentage-point lift to GDP in 2024, with more than two-thirds coming from extra household spending, mostly on cars. That figure came before the State Council, China’s cabinet, released details.

    The immediate GDP boost isn’t the only objective, Wrigley says, contrasting the current program with the emergency stimulus China rolled out after the Global Financial Crisis. “The program sets targets for 2027, implying medium-term growth support for domestic demand to offset the drag from the slowly adjusting property market,” he says.

    4. Will it help rebalance the economy?

    Xi has called for a focus on advanced industries, and China’s EV success is a symbol of that government-guided effort. But China is accused by the US and Europe of flooding global markets with cheap goods and not doing enough to encourage local demand. The trade-in plan, by helping Chinese buyers, could go some way toward addressing that criticism.

    Growth Leans on Industry as Household Spending Lags

    Monthly factory output and retail sales (December 2019 = 100)

    Source: Bloomberg Economics based on National Bureau of Statistics

    For carmakers, who face likely countermeasures in the European Union this year, it offers a hedge against a potential slowdown in exports. More broadly, the way support is allocated between households and industry — which isn’t entirely clear yet — will reveal whether the program can help offset an over-reliance on investment versus consumption to drive economic growth.

    Another charge against Beijing, reiterated by German Chancellor Olaf Scholz during a visit last week, is that international firms suffer discrimination in Chinese markets. At the April 11 briefing, a Ministry of Commerce official emphasized foreign and domestic companies will get equal treatment under the trade-in plan.

    5. What will happen to the old stuff?

    By requiring higher standards for the recyclability of products like lithium batteries, the plan will help Chinese businesses expand in overseas markets, especially “regions that have high environment standards,” Ding says.

    The program includes investment in recycling networks, with 2,000 stations to be added across China this year, and logistical systems. E-commerce firms and appliance producers, for example, will be encouraged to collect old machines at the doorstep.

    As of last year, China had 336 million cars and more than 3 billion fridges, washing machines and air-conditioners, according to Beijing. Recycling even a small share would be a challenge.

    “China has repeatedly fallen short of its own car and appliance recycling targets,” says Wrigley at Pantheon. “Many supposedly recycled cars end up back on the road, despite being a safety hazard and highly polluting.”

    — With assistance from John Liu, Fran Wang, Lucille Liu, and Tom Hancock


    The visit is part of the agreement to keep talking that Biden and Xi committed to when they met in San Francisco in 2023. They also spoke by phone earlier this month, in what was described as a “candid constructive” discussion that covered AI, fentanyl, climate change and other subjects. Since then, there’s been a visit by US Treasury Secretary Janet Yellen, where she outlined her tough stance on subsidies. Yellen castigated China for boosting its already huge manufacturing capacity as a way to drive domestic growth, saying that massive government spending on certain sectors will “lead to significant risk to workers and businesses in the United States and the rest of the world.”

    Blinken will likely take a strong line, too, against fresh tariffs on imports of Chinese steel, which would see the US impose new 25% levies on certain products. China’s Commerce Ministry has blasted the decision, saying it was “full of false accusations” and “based on the need of domestic politics.”

    To Beijing, everywhere it looks it sees the US seeking to limit China’s horizons. The annual joint military exercises between the Philippines and the US this week are the biggest ever — a clear sign to China that the lattice-like alliances Washington is building are strengthening. State media has said the drills threaten “regional peace and stability,” noting that the Australian Defense Force and the French Navy, for the first time, will also join as participants. Another 14 countries, including Japan and India, will take part as observers.

    Then there is the TikTok divest-or-ban bill, which on Saturday came one step closer to becoming reality. The US House put legislation on a fast track to force ByteDance Ltd. to divest its ownership stake. All of this is convincing China that the US is not keen to engage, but rather to contain, and that means a far less productive conversation on the cards for Blinken.

    Beijing is already bristling about the trilateral summit on April 11 between the US, Japan and the Philippines. China’s Ministry of Foreign Affairs has asked whether the true purpose was to engage in “group politics” and form “exclusive groupings.” On the South China Sea, Beijing’s position is clear: “No provocation or coercion will deter China from safeguarding its sovereignty and rights and interests.”

    China doesn’t make it easy for countries to cooperate with it. Beijing consistently advances its ownership claims in the South China Sea, and refuses to acknowledge the rights of other nations. It doesn’t believe the US should be anywhere near the contested waterway, seeing it as interference in its own backyard.

    This has been the tenor of the US-China relationship for a while now, as Ryan Haas notes for the Brookings Institute. “At their core,” he writes, “both countries believe their governance and economic models are best equipped to meet the 21st century’s challenges. Both believe they are natural leaders in Asia and on the world stage.”

    But this amount of conflict is unproductive and unsustainable. The China that the US is dealing with today is on the back foot economically, and as the pile of problems keeps growing there is a discernible crisis of confidence among citizens, particularly the youth who are now looking at a future that is likely to be nowhere near as fulfilling or successful as their parents’ generation.

    There is nothing more important to the Chinese Communist Party than its survival. The pressures on Xi and his regime are mounting on multiple fronts. If the US really wants to get China on its side to work on resolving some of the most urgent issues of our time, like climate change, the war in Ukraine and a potentially explosive Middle East, then more cooperation rather than confrontation could help to achieve that. The US has put together a lot of compelling sticks lately that have got China’s attention. Now is the time to dangle some carrots — perhaps in the form of further AI collaboration, countering the illicit drug trade, and improving people-to-people ties. Blinken should keep that in mind this week.

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    This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    Karishma Vaswani is a Bloomberg Opinion columnist covering Asia politics with a special focus on China. Previously, she was the BBC's lead Asia presenter and worked for the BBC across Asia and South Asia for two decades.
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