In China, consumption has become increasingly important to the economy, it contributed 76 percent to gross domestic product growth in 2018.

With the rise of income levels, the Chinese now spend more money on services including medical care, tourism, education and entertainment, along with a declining proportion on necessities such as food and clothes. At the same time, high-end products and overseas shopping are popular. These changes demonstrate the upgrading of China's consumption.

The"618" shopping festival in China, an online midyear shopping carnival on June 18, which was initially launched by JD.com, attracts millions of customers every year. This year, the event saw sales reach a staggering 201.5 billion yuan ($29.2 billion), with customers showing a preference for high-end products and services.

But although China's consumption is experiencing an overall upgrading, the growth of retail sales of consumer goods has shown a downward trend, caused by both internal and external macroeconomic uncertainties. From January to May, the year-on-year growth rate of sales was 8.1 percent, hitting the lowest since 2000. And internet platforms for low-priced or second-hand products also showed a drop when it came to consumption.

Looking into the factors responsible for this trend, there are some medium and long-term reasons, such as the decline of income growth and potential income growth; more job uncertainty against the background of the worsening external environment, the contraction of wealth thanks to the regulations on real estate prices as well as the restrictions on the growth of ostentatious consumption.

Consumption among various groups of Chinese is closely related to their asset structures and funding sources, which are influenced by asset price rises and a widening income gap in recent years.

For example, rising house prices have a positive impact on people owning real estate. So they spend more money on luxury goods, high-end education, medical care and services, and overseas tourism. But, people who are renting or plan to buy houses, have their disposable income reduced because of the higher housing prices.

The slowdown in income growth in recent years has also had a negative impact on some households whose main source of income is wages, while it has had a smaller impact on people doing business. In addition, the income growth of urban residents was basically stable in the first quarter of 2019 compared with the fourth quarter of last year, but the growth rate of expenditure fell by 0.5 of a percentage point to 4.1 percent.

This indicated that the willingness was not in keeping with the ability to spend. So, given the stable propensity of high income and wealth groups to consume, the marginal propensity of low-income and middle-income consumers is likely to decline. Therefore, consumption upgrading and consumption downgrading exists simultaneously.

So it is essential to boost consumption and its upgrading so as to sustain it as a driver of economic growth. In the short term, promoting consumption depends on the implementation of policies such as tax and fee cuts and direct stimulation of the consumption of durable goods.

Since the beginning of this year, the consumption-stimulating policies announced are not as strong as those in the past, and the effect of the tax and fees reduction has been offset by the external situation to some extent.

Therefore, local governments need to introduce more effective policies. More people should benefit from tax reductions and fee cuts, which can raise medium-and long-term disposable incomes.

From the perspective of companies, government at all levels should strengthen their policies to reduce corporate tax and stabilize employment. It is also important to accelerate land reform in rural areas to fully tap the consumption potential of the counties.

The consumption of low-income groups has increased, which is a key reason for the upgrading. In recent years, the income of migrant workers compared to urban residents has grown rapidly with the implementation of targeted poverty alleviation policies.

Data provided by JD.com showed that during this year's "618" shopping gala, customers in lower-tier markets were more active. And the growth of orders created by them was twice as much as the average. Also, the proportion of new users in lower-tier cities and towns, with strong consumption power, is larger than those in other places on the platform.

Considering the higher marginal propensity to consume among lower income groups and the high consumption growth rate of migrant workers compared with urban residents, the huge market potential and room for upgrading of consumption in counties will create an important driving force boosting China's consumption growth in the future.

The author is vice-president and chief economist of JD Digits.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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