China must copy Spain to resolve its economic crisis: the key lies in the way it consumes.

China is on its way to becoming the world's largest economy. With GDP growth hovering around 5%, if this or a similar pace is maintained, it's only a matter of time before the long-awaited overtaking of the US in GDP in current dollars occurs . To this end, Beijing is pursuing policies that seek to reduce China's dependence on foreign countries, attempting to stimulate consumption (generate an autonomously functioning internal demand engine) and achieve a kind of "partial autarky" in which only what China cannot produce for compelling reasons (raw materials, some foodstuffs, etc.) is imported. Although it may seem strange in the West, China is having serious problems with the former: it cannot get its citizens to consume at the level required for this component to gain weight in GDP from the demand side. The factors that explain this curious "inability" or economic deficiency are multiple, but the truth is that if Beijing wants to overcome this deficiency, it should take note of what the Spanish do and their way of consuming.

A recent report published by JP Morgan reveals that China's biggest consumption problem is directly related to services. The Chinese consume far fewer services (restaurants, hotel stays, entertainment, etc.) than Spaniards or Americans (US), which generates this quasi-permanent weakness in what is typically the engine of growth in any developed economy . In contrast, the Chinese consume relatively normal goods (food, computers, clothing, washing machines, etc.). According to JP Morgan, the problem is services!

Chinese society already has a relatively low propensity for consumption compared to other economies at this stage of development (China is already an advanced economy, or nearly so, in terms of per capita income). The major shortcoming, as noted above, lies in the consumption of services, which barely accounts for total consumption. In the case of Spain, for example, the opposite is true: household final consumption represents around 56% of GDP, and sometimes even more. Of all this consumption, more than 50% is spent on services, with spending particularly on restaurants and accommodation services (16% of total spending), transportation, and personal care, according to data from the National Institute of Statistics (INE). All of these expenditures have a significant impact in advanced economies, although it is true that in Spain's case, it tends to be slightly higher due to the unique characteristics of our production system and different preferences.

China's case is quite unique, as it appears to be at the antipodes of advanced countries, despite the powerful development of its economy and the number of years it has dominated savings/investment over consumption. The GDP model or pattern should have shifted toward that of a more advanced economy. "China's consumption share of GDP is low, not only compared to advanced economies, but also compared to countries at similar stages of development . Household consumption accounted for only 39% of China's GDP in 2023, while the global average is 56%. On the other hand, China's investment share of GDP (41% in China versus 26% global average) and domestic savings rate (44% versus 27%) are much higher. High savings, high investment, and low consumption are widely perceived as important features of China's growth model, but they have recently contributed to structural imbalances between demand and supply and ongoing deflationary pressures," JP Morgan said.

China's low consumption hides several important facts . First, China's consumption is low, but not weak. Consumption growth in China (in real terms) averaged 9.6% year-on-year in 2000-2009 and 9.3% in 2010-2019 (and slowed to 5.4% in 2020-2023), among the highest growth rates in the world. This low consumption is observed in relative terms compared to strong GDP growth (10.4% in 2000-2009 and 7.7% in 2010-2019).

Second, the study by JP Morgan shows that the main driver of consumption is household income growth. Weak consumption growth in recent years is attributable to weak income growth. But this sometimes leads to the misperception that China's low consumption is due to a low share of household income in GDP. This is not true. Household disposable income accounts for 43% of GDP in China , a not insignificant figure compared to the rest of the world's economies. This is primarily due to an unusually high savings rate , which is related to the inadequacy of the Chinese social safety net, explain the American bank's experts.

"Third, and perhaps most importantly, China's low consumption primarily reflects low consumption of services, rather than low consumption of goods," these experts explain. A comparison between China and Spain or the United States suggests that the consumption structure is very different . "The share of goods consumption in GDP is practically the same today. The weight of services consumption (46% in the United States, over 50% in Spain, versus 18% in China) almost entirely explains the difference in the share of overall consumption," note the JP Morgan economists.

Analyzing long-term data from advanced economies, one can observe how service consumption gradually gains ground as these countries become wealthier . This is also confirmed by experts at JP Morgan who have dissected US consumption: "The history of US consumption shows that as a country becomes wealthier, the share of goods consumption tends to decline and that of services consumption to increase. However, even when comparing countries at different stages of economic development, service consumption in China is also significantly lower than that of countries/markets with similar or lower GDP per capita," JP Morgan states, which is quite surprising.

JP Morgan experts offer several coherent and related reasons. First, some components of services consumption are poorly recorded, the most well-known of which is the housing services component, which until recently was not included in the services basket. This means that part of the mystery may simply be a misreading of Chinese consumption.

Another reason put forward by JP Morgan economists is also reasonable: since many services are not tradable or exportable (a haircut or a meal at a restaurant), they tend to be priced below their true cost, for example, healthcare, education, etc. Healthcare accounts for only 2% of China's GDP (compared to 7.6% in the US), while other social indicators suggest that China's number of hospital beds and life expectancy are significantly above the world average.

Third, and most importantly, " China's services sector is underdeveloped . For example, financial services, legal services, tourism, entertainment, sports, etc. The proportion of services consumption tends to increase as an economy grows richer," explains JP Morgan. In the Spanish economy and much of the advanced world, entertainment, hospitality, and sports account for an ever-increasing portion of consumption . Not only because this type of consumption generates highly satisfying experiences, but also because they can be consumed almost infinitely.

While buying a television or a washing machine presents certain space limitations and very strong diminishing marginal utility (the first washing machine is very helpful and satisfying, but the second is usually not as useful or appreciated), going out to dinner, going to the theater, or playing a game of paddle tennis are activities with weak diminishing marginal utilities or even increasing marginal utilities, something that may seem like a real inconsistency in economics. But seeing a play or playing paddle tennis can generate greater satisfaction as consumption increases (greater understanding, skill, and enjoyment are achieved). This is where the Chinese economy has room to progress.

Therefore, " underdevelopment in this area offers China great potential to boost service consumption , which we consider a priority in its policies. Indeed, in recent policy statements (for example, the National People's Congress (NPC) in March and the Politburo meeting in April), the government has mandated increasing household income and boosting service consumption as two priority tasks," these experts point out.

Services consumption not only has greater growth potential than goods consumption, but is also important for creating new employment opportunities, mitigating unemployment pressures, and supporting household income growth. Human capital is important in most high-value-added service sectors, implying that a larger share of value added can be allocated to income (more and better-paid jobs) compared to the high capital intensity and low share of labor income in many advanced manufacturing sectors. Even better, boosting services consumption is less dependent on fiscal stimulus. While fiscal support is needed for social or services-related infrastructure, a transparent and coherent policy environment is most important. This means addressing the policy bottlenecks created by the regulatory uncertainty of recent years, coupled with continued services liberalization , according to the JP Morgan report.