China makes a safe space for consumers. Will they spend?

Emerging from nearly a year of battling an economy dragged down by Covid-19 and a rickety financial system, Beijing is realizing what the most important collateral damage has been: consumers. Without their wallets and balance sheets, China's economic blueprint for the next five years won't work.

That explains why authorities have been talking up consumer protection, household leverage and the risks of fintech lenders. At a State Council meeting last week, boosting consumption – from autos and services to home decoration – topped the agenda. Separately, the banking and insurance regulator pointed to major problems that it's targeting and would investigate. Among them are high interest fees and problems with online tech platforms, insurance sales and complex wealth management products. Household balance sheets are increasingly indebted, while creditworthiness is weakening.

The focus on consumers is understandable. Ultimately, any percentage of some 1.4 billion people who feel poorer or have lost money could undermine the social stability so highly prioritized by the government. Without them, the recovery and future goals will be derailed. The growth strategy unveiled in the new five-year plan depends partly on generating consumer demand. Currently, Beijing has been able only to boost supply.

In protecting its hundreds of millions of households, the government wants buyers to know their rights and to empower them – or at least to make them feel that way. It's a theme taking hold globally. The Group of 20 leaders' declaration last weekend touched on the subject, while the European Commission has launched a new consumer agenda for citizens to "play an active role in the green and digital transition."

In China, courts are hearing more cases that involve complaints over online shopping for food, electronics and healthcare products. Beijing has a draft personal information protection law in the works that could become the country's first legislation in safeguarding an individual's data. The central bank has announced new measures to protect consumers' rights and fined six state-owned banks for infringing them.

The government's plan involves extending each yuan of household income. While the lending side has taken much of the blame for excesses in the online fintech draft rules, the reality is that consumers and small companies have had their borrowing capped above certain levels. Earlier this month, China loosened restrictions on licensed consumer finance companies to enable lower provision coverage ratios. That would allow them to lend more, and help consumers borrow more. The banks need retail franchises to thrive because the balance sheets of their corporate clients continue to look burdened.

It will be a challenge. Beijing has spent $1.3 trillion to lift the economy out of Covid-19.  But consumers aren't ready to spend yet and are holding onto their cash. The household savings rate for the first three quarters of 2020 came in at 37.2% as a portion of disposable income, compared to 32.2% in the same periods in the preceding three years, Morgan Stanley analysts show. Consumption in most sectors isn't growing, though a recovery is afoot in pockets like autos, where incentives are rising. Retail sales grew last month, but were barely over half their pre-virus levels, according to S&P Global Ratings. 

Will making consumers feel secure help China battle a problem that it's faced for years: a falling household consumption ratio? So far, it doesn't appear so. China's stands at 39% of gross domestic product, according to Goldman Sachs Group Inc. analysts, compared to 68% in the US, where the propensity to consume as well as household disposable income ratios are higher. In China, however, falling disposable incomes are a major factor driving the decline, as is a rise in urban savings. Making each yuan go further won't solve the problem until consumers either have more money, or feel financially safer. Beijing hasn't shown it's helping on this front. 

One way would be to step up communication and information. Broader protection is commendable and obviously necessary. But a muddled approach doesn't help, such as restricting online fintech loan facilitators that borrowers want to tap, and forcing action from others like consumer financing companies that are theoretically easier to regulate. Think about the upended initial public offering just suffered by Jack Ma's Ant Group.

Safeguards need to be executed with the right long-term goals in mind and no room for short-term regulatory arbitrage. With the wrong rules, China may be creating room for yet more unwanted behavior.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

Disclaimer: This opinion first appeared on bloomberg.com, and is published by special syndication arrangement.