(Yicai) Dec. 10 -- No one loves a bargain more than my wife. She considers it a point of pride to pay the lowest possible price when she shops. 

It is no wonder, then, that the Shanghai municipality’s decision to issue CNY1 billion in consumption coupons has made her autumn. These coupons offer consumers discounts for purchases that exceed threshold amounts on meals, hotels and movies. For example, Shanghai offers four levels of dining coupons that provide discounts of 30 percent on minimum purchases of CNY300, CNY500, CNY800 and CNY1000. 

The city of Shanghai is distributing these coupons in three phases: CNY200 million were issued in August and an additional CNY500 million were handed out just before the October 1 National Day holiday. The final tranche became available in December.

The major payment platforms offer a set number of coupons each week on a first-come, first-served basis. For my wife, the challenge of being one of the fortunate ones to grab a coupon has been another source of fun and excitement. Last weekend, she got lucky and we were able to take our daughters to see the film Moana 2. Thanks to the subsidy, we only paid CNY15 for each of the CNY35 tickets.

If the city of Shanghai’s generosity were not enough, the Pudong district, in which we live, is also offering dining coupons.

Pudong will issue CNY100 million in dining coupons in 12 weekly tranches between November 8 and January 24. The scope of its coupons is somewhat narrower than Shanghai’s. To be eligible, we have to order a set meal from one of the participating restaurants. But Pudong’s subsidies can be larger – up to CNY400 off on a CNY900 meal.  

Pudong’s promotion came at just the right time for us. Last week, we were able to treat my saintly mother-in-law to a CNY1000 birthday feast. It was dinner for nine and we only paid CNY600. 

Shanghai’s CNY1 billion consumption coupon programme follows its CNY4 billion scheme to support the purchase of new consumer goods, including appliances and automobiles.

It is easy to see why Shanghai is eager to boost consumption. 

In 2023, retail sales recovered nicely from the pandemic-induced downturn the previous year and set a record high. This year, however, they have been disappointing, falling 2.0 percent year-to-date (Figure 1). For the country as a whole, retail sales are up 3.5 percent year-to-date, making Shanghai’s situation appear particularly grim.

That said, Shanghai is not the only jurisdiction interested in boosting consumption. Many other cities and provinces have similar programmes.

Figure 1

While the CNY5 billion in Shanghai’s consumption promotion programmes sounds like a lot of money, the city’s retail sales totalled CNY1.9 trillion last year. So, one might wonder how effective these subsidies can be in supporting the market.

Fortunately, recent research suggests that, in a well-designed programme, a limited government subsidy can lever significant consumer spending. Economists from the University of Chicago, Kent State and Tongji University looked at China’s experience with consumption coupons during the pandemic. Using microdata from the digital platforms, they determined spending increased by CNY3.1 to 3.3 for every yuan spent by the government. 

The key to leveraging consumer spending comes from the value of the coupon’s threshold. It has to be high enough for spending to increase substantially in order to take advantage of the coupon. In fact, the threshold needs to be set higher than what the consumers would have preferred in the absence of the coupon or the government would simply be subsidizing consumption that would have occurred anyway.

Figure 2, which is taken from this research paper, shows the distribution of spending for those consumers who received and used a coupon that offered a discount of CNY18 on a purchase of CNY54. It compares two periods: the “period of interest” in which the coupon was used and the earlier “pre-period” which acts as a control. Among these consumers, there is clear evidence of a “bunching” of purchases at the CNY54 threshold during the period of interest. 

To the left of the CNY54 threshold, we see that purchases fell compared to the pre-period control. In order to take advantage of the coupon, consumers refrained from making smaller-value purchases. This suggests that they spent more than they otherwise would have in order to redeem the coupon and earn the subsidy.

Figure 2

Bunching of Purchases

Source: Ding et al

Since the researchers had access to the full range of purchases each consumer made on the platform, they verified that those who received a CNY54 coupon, which was targeted for the use of supermarkets, did not spend less on other items such as food delivery, restaurants or entertainment. Nor did they find that the spending made to use the coupon was “borrowed” from future consumption: the distribution of spending in periods following the coupon’s use was quite similar to that of the pre-period. A key aspect of the programme design was that the coupon’s use was time limited. Whereas a cash transfer could be saved, the coupon had to be used before it expired. 

It appears to me that Shanghai’s dining coupon program is really very successful. My wife agrees that we have never seen the city’s malls and restaurants so crowded. But it’s not just our impressions. According to data shared by Shanghai’s Municipal Commerce Commission, purchases at restaurants totalled CNY58 billion during the period for which the programme has been in effect. That’s an increase of 11 percent year-over-year. 

These data suggest that the dining coupons have been a very cost-effective way of stimulating consumption. Let’s assume that all of Shanghai’s planned CNY700 million in subsidies were fully utilized as were all of Pudong’s CNY33 million between November 8-28. Since spending on restaurant meals increased by CNY5.9 billion, the implied leverage was 8 times or well above what the researchers found during the pandemic.

Moreover, since the VAT on dining out is 9 percent, the additional restaurant sales yielded CNY534 million in taxes, which allowed the government to recoup close to three-quarters of its initial outlay. 

The Shanghai Municipal Commerce Commission also noted that October’s foot traffic in Shanghai’s business district was up 10 percent from last year. This likely induced some people to make unplanned purchases, further supporting the economy while paying even more VAT to fund the dining coupon programme.

To the extent that the dining coupons significantly boost the economy without imposing a major fiscal burden on the government, they come pretty close to being a free lunch – something my wife would definitely approve of.