Shanghai stock exchange observation ｜ how to treat the old-for-new policy of consumer goods

　　Author: Lian Ping Luo Mang

　　Consumption is an important engine of economic development, which is connected with the macro-economy at one end and thousands of households at the other. Trade-in of consumer goods helps to activate the "spring water" of consumption. The Central Economic Work Conference held at the end of 2023 and the fourth meeting of the Central Financial and Economic Committee held last month made detailed arrangements for promoting the trade-in of consumer goods, and then the National Standing Committee deliberated and adopted the Action Plan for Promoting Large-scale Equipment Renewal and Trade-in of Consumer Goods.

　　The 2024 government work report pointed out that traditional consumption should be stabilized and expanded, and consumer goods should be encouraged and promoted. Promoting the trade-in of consumer goods is an important decision made by the government in view of the overall situation of China’s high-quality development. This policy will not only help to release the potential improved consumer demand of residents, further stimulate the vitality and growth potential of the consumer market, but also promote consumption upgrading and industrial structure optimization and upgrading, and promote investment growth in related industries, which is of great significance for achieving high-quality economic development.

　　First, the trade-in policy for consumer goods is necessary.

　　At present, China’s macro-economy is generally in the recovery period after the epidemic. Although the trend of recovery has not changed, it still faces some difficulties and challenges, especially the problem of insufficient effective demand caused by weak residents’ willingness to consume. Although the retail sales of social consumer goods increased by 7.2% in 2023, and the contribution rate of final consumption to economic growth reached 82.5%, it was based on a low base in 2022. According to the two-year average growth rate, in fact, consumption recovery is slow. The retail sales of social consumer goods increased by an average of 3.4% in two years, far below the growth level of more than 8% before the epidemic. Among them, the sales of automobiles increased by 3.3% on average in two years, while the sales of furniture and household appliances decreased by 2.5% and 1.7% respectively in two years. According to statistics, durable consumer goods such as automobiles and household appliances generally account for about 35% of the total retail sales of enterprises above designated size, which can play an important supporting role in consumption. However, from the above data, it can be found that in the past two years, the contribution of durable consumer goods to overall consumption was very limited, and some even became a drag. In this year’s government work report, it is proposed to promote the steady growth of consumption from the aspects of stabilizing and expanding traditional consumption. The policy deployment of trade-in of consumer goods means that this year’s consumption promotion policy will be launched in advance in key areas, especially the trade-in of traditional durable consumer goods such as automobiles and household appliances, which will become a key task to promote the steady growth of consumption this year. At the same time, the consumption market of durable goods in China is huge. With the development of economy and the improvement of people’s living standards,Large durable consumer goods, such as automobiles and household appliances, have entered the era of equal emphasis on increment and stock from the simple incremental era. In 2023, the number of automobiles is about 336 million, and the number of major household appliances such as refrigerators, washing machines and air conditioners exceeds 3 billion. Some household appliances have been used for more than ten or twenty years, and there is great demand and potential for upgrading.

　　In the short term, the trade-in policy can stimulate consumer demand and promote related investment, effectively stimulating and expanding domestic demand. On the one hand, by exchanging old products for new ones, more high-quality new products can enter the market, which can promote residents to replace and upgrade a number of new products, fully meet residents’ diversified and personalized needs and the pursuit of a higher quality of life, and improve residents’ satisfaction and experience; On the other hand, by lowering the cost threshold of replacing new products, residents’ willingness to buy will be boosted, so as to tap and activate the depth and breadth of the consumer market. At the same time, trade-in can also drive related investment and promote the development of related industries. Trade-in consumer goods are mainly durable consumer goods, such as cars and home appliances. These products usually have a long industrial chain, involving more manufacturing sectors. Trade-in will help to expand the demand of related manufacturing industries and promote the growth of related investment. In the long run, trade-in can not only further promote the transformation and upgrading of consumption and the optimization and upgrading of industrial structure, but also give new kinetic energy to economic development, and at the same time increase advanced production capacity and improve production efficiency, thus driving the economy to achieve high-quality transformation and development.

　　Second, trade-in will bring considerable consumption increase.

　　Trade-in involves large durable consumer goods such as automobiles, home appliances and furniture, which is expected to bring about a large-scale consumption increase, and it is a trillion-dollar market.

　　Automobile occupies an important position in China’s durable consumer goods and has a strong pulling effect on consumption. According to statistics, at present, the number of passenger cars of Grade III (meeting the third-stage automobile emission standard of China) and below is about 16 million. According to the average 15-year scrapping cycle, it is estimated that the number of vehicles eligible for scrapping will be about 7.5 million in 2024. According to the average selling price of 170,000 yuan, the replacement of all these old vehicles will bring about 1.3 trillion consumption scale increase in 2024. In 2021, the number of scrapped vehicles in China will reach 3 million. If the average annual growth rate of scrapped vehicles is 15.6% in the past 15 years, the number of scrapped vehicles will be about 4 million in 2024. After removing all kinds of costs, the replacement of old vehicles is expected to bring about an increase of consumption of about 250 billion to 300 billion.

　　The stock of household appliances in China is relatively large. If we subtract the scale of internal sales within six years, there will be more than 200 million household appliances such as air conditioners, refrigerators, washing machines, color TVs and range hoods with a service life of more than six years in 2024. The average safe service life of most household appliances in China is 10 years. According to statistics, on average, about 270 million household appliances have exceeded their safe service life by standards every year. If the trade-in policy can stimulate an additional 5% of product updates, it is expected to drive the demand for product updates of about 13.5 million units, bringing about an increase in new consumption of about 100 billion.

　　To sum up, the total consumption of automobiles and household appliances is expected to increase by about 350 billion to 400 billion yuan, driving the growth rate of total retail sales of consumer goods to increase by about 0.7 percentage points in 2024. Assuming other factors remain unchanged, the year-on-year growth rate of total retail sales of social consumer goods in 2024 may therefore increase from the original forecast of 5.5% to around 6.2%.

　　Third, suit the right medicine to promote the implementation of the trade-in policy as soon as possible

　　Although the starting point of the trade-in policy is very good, there are many problems in the actual operation process, which makes it difficult to really implement the trade-in of durable goods. First, although many brands of household appliances have recycling channels, their enthusiasm for recycling is not high. "Can’t change" has become the main obstacle to trade-in home appliances. The online platforms of several home appliance brands clearly indicate that they don’t support trade-in and can’t recycle used home appliances, so many residents are still used to selling used home appliances to waste buyers. Second, due to the low subsidy, "don’t want to change" has become a constraint for car trade-in. Although all major car companies have replacement subsidies ranging from 3,000 yuan to 10,000 yuan, the replacement subsidies and car collection prices given by many 4S shops are not as high as the car collection prices of used car dealers, so consumers are more willing to sell their cars to used car dealers. The main reason is that many 4S shops will resell the replaced cars to used car dealers, so they dare not pay a high price.

　　In view of the above problems, it is suggested to start from the following five aspects to promote the implementation of the old-for-new policy. First, improve the recycling system. How to recycle and reuse the old goods in the trade-in process is the key. The reason why home appliance manufacturers and 4S stores are not enthusiastic about recycling is mainly due to the imperfect recycling system in China and insufficient government subsidies and incentives. We should learn from the experience of developed countries and establish a sound recycling system for old things. The government should increase financial subsidies to manufacturers, and require manufacturers to set up special recycling departments by establishing incentive mechanisms and corresponding laws and regulations to meet the large-scale recycling demand. The second is to increase the recycling subsidies for consumers. For each recycled vehicle, the 4S shop should evaluate it and give a price not lower than that of the used car dealer. If the purchase of vehicles is increased by family, the policy of halving the purchase tax will continue to be implemented, while if the updated or increased vehicles are pure electric vehicles, the subsidy for car purchase replacement will be given at around 5,000 to 10,000 yuan according to the standard. In cities where vehicles are restricted, we can consider trading pure electric used cars, allowing the transfer of ownership with a license and keeping the seller’s new energy license index for 3 to 6 months. The third is to give tax reduction, tax exemption and excessive financial subsidies to car companies and 4S shops that actively participate in recycling. In 2024, financial subsidies for the trade-in of automobiles and household appliances should be increased. It is estimated that the financial expenditure on trade-in of consumer goods may reach 200 billion yuan, plus the reward and compensation for resource recycling and moderate tax relief.It will additionally stimulate residents’ demand for durable consumer goods to update by about 400 billion yuan. The fourth is the coordination of financial institutions. Financial institutions design and launch auto credit consumer products. Commercial banks and auto financing companies are encouraged to provide differentiated auto credit products in terms of interest rates and account periods according to consumers’ credit status and models. Preferential interest rate or discount will be given to the replacement and renewal, especially the replacement of fuel vehicles with new energy vehicles. The fifth is to encourage manufacturers to increase R&D efforts from the policy level. On the one hand, car companies should strengthen basic research and development and independent innovation to create cost-effective car products; Home appliance manufacturers should develop more intelligent and green home appliances to attract and stimulate market demand. On the other hand, car companies and home appliance manufacturers should also increase research and development efforts to enhance the ability to turn old things into treasure.

　　About the author:

　　Lian Ping: President and Chief Economist of Guangkai Chief Industrial Research Institute.

　　Luo Shuan: Senior Macro Research Fellow, Guangkai Chief Industry Research Institute.