China’s ambitious plan to stimulate consumption through a massive trade-in policy has yet to produce significant results, according to several industry experts. The initiative, announced in July, involves allocating 300 billion yuan ($41.5 billion) in ultra-long special government bonds to support both consumer trade-ins and equipment upgrades. Despite this substantial financial commitment, businesses and analysts are questioning the program’s effectiveness and its potential impact on the market.

Trade-In Policy: The Details and the Reality

The Chinese government’s strategy aims to invigorate consumer spending by subsidizing the trade-in of vehicles, home appliances, and other major consumer goods. Half of the allocated amount is designated to support trade-ins, while the remaining funds are intended for upgrading large equipment such as elevators. Local governments are authorized to use these ultra-long government bonds to provide subsidies for qualifying purchases.

However, the implementation of this policy has faced hurdles. The program requires consumers to have a used product to trade in and to make an initial financial outlay. This model has not yet translated into substantial incentives on the ground, according to Jens Eskelund, president of the EU Chamber of Commerce in China. “We are not aware of companies that have seen this translate, since the promulgation of the measures, into concrete incentives on the ground in China,” Eskelund said. He added that the focus should now shift to ensuring effective execution for tangible results.

Limited Impact on Consumption

The chamber’s analysis suggests that the central government’s budget for this policy amounts to approximately 210 yuan ($29.50) per capita. Given that only a fraction of this budget will directly benefit individual consumers, the potential for this scheme to significantly boost domestic consumption appears limited. This sentiment is echoed by UBS Investment Bank Chief China Economist Tao Wang, who in July estimated that the new trade-in program might support only about 0.3% of retail sales in 2023.

Recent retail sales data further complicates the picture. Retail sales growth in June was a mere 2%, the slowest rate since the Covid-19 pandemic, while July saw a modest improvement to 2.7%. Despite these lackluster figures, the new energy vehicle (NEV) sector experienced a remarkable surge, with sales rising nearly 37% in July. This highlights a key area where the trade-in policy has had some impact—particularly in the EV sector—but broader retail sales have yet to benefit significantly.

Challenges in Equipment Upgrades

The policy’s focus on upgrading large equipment, such as elevators, has also faced challenges. Although the trade-in policy has more than doubled existing subsidies for new energy and traditional fuel-powered vehicles, the results have been mixed for equipment upgrades. For instance, in March and April, China initiated policies to support equipment upgrades broadly, noting that around 800,000 elevators in the country had been in use for over 15 years.

Despite these efforts, two major foreign elevator companies, Otis and Kone, reported limited success under the new program. Sally Loh, president of China operations for Otis, mentioned that while there is awareness of the overall funding, specifics regarding allocation for elevators remain unclear. “We are still at the very early stage on this whole program right now,” Loh said. She noted that the funding helps resolve some financing concerns but has yet to translate into concrete new orders.

Similarly, Kone’s Greater China revenue fell by over 15% in the first half of 2024, impacted by a downturn in the property sector. Kone CFO Ilkka Hara acknowledged the potential of the policy to act as a catalyst for change but conceded that its impact on immediate sales remains uncertain. “How quickly it materializes, that’s hard to say,” Hara said.

Slow Implementation and Long-Term Prospects

One of the underlying issues with China’s trade-in policy is the slow pace of implementation at the local level. Several major cities and provinces have only recently begun to detail how the trade-in program will operate for residents. This slow rollout could delay any significant impact on both consumer behavior and equipment upgrade markets.

For ATRenew, a company specializing in processing secondhand goods, the ultra-long government bonds program has not yet had a noticeable short-term effect. CFO Rex Chen acknowledged that while the policy supports the long-term development of the secondhand goods market, immediate impacts are limited. He expressed hope for increased government support in building trade-in kiosks within local communities. Nonetheless, there have been increases in trade-in volumes for specific categories and regions, such as mobile phones and laptops in Guangdong province, as well as a notable rise in trade-in orders through e-commerce platform JD.com.

Broader Implications for the EV and Equipment Upgrade Markets

The mixed results of China’s trade-in policy highlight significant implications for both the electric vehicle (EV) and equipment upgrade sectors. For the EV market, while the policy has contributed to a surge in NEV sales, broader consumer adoption remains constrained by insufficient charging infrastructure and high vehicle costs. The trade-in program alone is unlikely to address these deeper issues.

In the equipment sector, especially for large items like elevators, the policy’s effectiveness is contingent on more precise allocation and clearer communication about funding. Companies like Otis and Kone are hopeful but cautious, recognizing the policy’s potential while awaiting more concrete benefits.

Overall, while China’s trade-in policy is a step toward boosting consumption, its current implementation challenges and the slow pace of local adaptation suggest that its broader impact may take time to materialize. Both consumers and businesses are closely watching for more effective execution and clearer results as the program evolves.

(Adapted from CNBC.com)