The divergence between retail sales and
other metrics suggest that this round of China’s
consumption boom is driven by the wealth effect
from the property bubble.
That is certainly what is indicated by the fact
that the consumption boom seems stronger for
luxury goods than staples. This was highlighted
earlier this summer with the “consumption
upgrade” of Chinese consumers.
consumption of SUVs and entertainment rose
much faster than total retail sales.
In our estimate, this is representative of the
most important fact in the Chinese economy
today: namely that property prices since 2010
have created dramatic “paper wealth” across
The ratio of wealth gain from
property price appreciation to disposable
income in 2016 was most prevalent in the major
cities – 4.9 times for tier one cities, 3.8 times for
the top tier two cities, 0.6 times for the bottom
tier two cities, and 0.8 for so-called satellite tier
Far from stabilising, the wealth effect
appears to be spreading to tier two and tier three
cities. In the first three quarters of last year, the
property wealth efect was 1.9 times disposable
income in bottom tier two cities, 2.4 in satellite
tier three cities, and 1.9 in other tier three cities.