The Chinese government has rolled out a series of support policies since the beginning of the year to stimulate consumer demand and encourage the optimisation of supply and demand.
Recently, the National Development and Reform Commission rolled out 20 measures, a wide-ranging plan to boost consumption in cars, furniture, household appliances, tourism, catering, entertainment and exhibitions, as well as digital products. It details aspects from supply to demand, looking into service models, supporting facilities, financial support and product innovation.
Some commentators have supported these policies. Cai Fang — the former vice-president of the Chinese Academy of Social Sciences (CASS) and member of the People’s Bank of China’s Monetary Policy Committee — noted that the Chinese economy has entered a post-pandemic “new normal”, which warrants new approaches to the country’s macroeconomic policy by redesignating “consumption” as its new objective.
Cai noted that even before the pandemic, the Chinese economy was already becoming a consumer-driven one. In the first half of this year, final consumer expenditure contributed as much as 77.2% to China’s economic growth.
Cai thinks that the pandemic has somewhat damaged this trend and sluggish consumption has become a key obstacle hindering China’s economic recovery. It is thus necessary to shift the target of China’s macroeconomic stimulus policy from investment to consumption to directly tackle the obstacles and shortcomings of the real economy.
Stimulating consumption the only way?
Of course, not everyone agrees with his viewpoint. Renowned Chinese economist Justin Yifu Lin once publicly said that the people who argue that China’s investment-driven economy is unsustainable and should be turned into a consumption-driven economy either do not understand economics or are intentionally misleading China.
... even if the people have money, it would be impractical for them to spend it hastily, since they would feel “doomed” if they were to become sick and had to be hospitalised.
And Lin is not the only one who opposes stimulating consumption. Recently, former Renmin University of China vice-president and economic expert Wu Xiaoqiu told the media that one must not think of using domestic demand to replace external demand. While there is a need to expand domestic demand, this cannot be accomplished by “stimulation” alone because domestic demand cannot substitute external demand.
According to Wu, there are a few prerequisites for increasing domestic demand: first, a high employment rate — people who are under great employment pressure and are concerned about losing their jobs are less likely to spend — second, a growing income; and third, a robust and effective social security system.
Without such a system, even if the people have money, it would be impractical for them to spend it hastily, since they would feel “doomed” if they were to become sick and had to be hospitalised.
Looking at Wu’s remarks, it is clear that “domestic demand” refers to household final consumer expenditure. Wu believes that it would be ineffective to forcefully boost household consumption when the three prerequisites have not been met. He said, “I have a different perspective from some academics. They often suggest handing out money or consumption vouchers, but in my opinion, this isn't the best course of action.”
Why is it so difficult to boost domestic demand? The answer is the lack of a social security system and a slow-growing disposable income.
Production in China outstrips demand
Simply put, to Wu, driving economic growth through expanding consumption is ineffective and unsustainable under current conditions.
I concur with Wu. Many years ago, I made a similar argument in an article (《中国危机远比美国要麻烦的多》, China’s crisis is way more troublesome than the US’s) published in Guang Ming Daily: “As long as the US — the crisis’s primary cause — finds a solution to the lack of liquidity in its financial system, its problems will essentially go away. However, China is not so ‘lucky’ because it needs the domestic market when the export channel is closed. Europe and the US need time. China, on the other hand, does not have that much time because creating a domestic market that can match its current production capacity is too big a task.”
At present, China’s development is still overly focused on investment and exports, and severely lacks domestic demand, leading to a few questions. Why is China’s industrial structure distorted? Why is it so difficult to boost domestic demand? The answer is the lack of a social security system and a slow-growing disposable income.
When a country lacks a sound social security system and the people’s disposable income grows too slowly, they develop a mindset of saving for a rainy day. Housing, education and medical expenses, as well as emergency savings, will dominate the people’s consumption and investment structure and behaviour, further reducing daily expenditures. This inevitably leads to insufficient domestic demand and further distortion of the industrial structure.
... over the next decade or so, the support structure of the social security system will quickly shift from the current average of three caring for one, to two caring for one. How could people feel financially secure?
Shift focus to consumption
To fundamentally solve China’s economic crisis, the focus of economic growth must be shifted to consumption, and the key to achieving this lies in the establishment and improvement of the social security system. But the problem is, building a comprehensive social security system is not something that can be quickly achieved.
Indeed, the establishment and improvement of a social security system is a huge problem for China, especially when the demographic dividend is becoming a deficit. Based on China’s current population structure, over the next decade or so, the support structure of the social security system will quickly shift from the current average of three caring for one, to two caring for one. How could people feel financially secure?
This can only be solved by increasing labour productivity, which relies on technological advancements and the improvement of allocative efficiency, which is in turn related to the institutional aspect of the supply side.
Therefore, the biggest problem of China’s economy is with the supply side, which requires in-depth institutional planning and long-term adjustment over factors such as the Chinese labour force, capital, technology and regulation.
This article was first published in Lianhe Zaobao as “中国经济缺乏扩大消费的基础”.
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