There is a significant temperature difference between China's macroeconomic data and microeconomic perceptions. In the first half of the year, the largest contributors to growth were exports and non-housing investments, but their transmission to residents' income and asset prices was poor, and consumer activity still lacks momentum. Exports are cyclical and are encountering increasing geopolitical resistance; investments face challenges such as rising debt and declining returns, and further strengthening supply will exacerbate future supply and demand imbalances. This "dual-track" recovery is not very helpful for the long-term structural narrative of the Chinese economy. In this sense, directly focusing on boosting consumption and smoothing the internal cycle is both a need for long-term sustainable economic growth and a key to reversing public and market expectations.
The rebalancing of consumption is not a new topic, but it is time to pay more attention to it. Since Bernanke proposed the "savings glut theory" for China in 2005, the discussion on rebalancing has been going on for 20 years. So far, progress has been very limited. The proportion of resident consumption in GDP has not exceeded 40% in the past 20 years. Although consumption has recovered after the pandemic, the consumption rate was only 39% last year, and the total retail sales gap has widened compared to the pre-pandemic trend. As economic growth slows down, some factors make it necessary for our current policy focus to tilt towards consumption:
Advertisement
First, economic size. China is already the world's largest exporter, with a market share of about 15%; last year's exports were $3.4 trillion, almost equal to India's GDP ($3.7 trillion). In some industries, China's production capacity has an absolute advantage globally. In traditional industries, such as crude steel output, China accounts for 55% of the global total; in emerging industries, China's photovoltaic capacity accounts for nearly 90% globally, lithium battery capacity is about 80%, and electric vehicle production accounts for 65% of global sales.
Second, geopolitics. After the US-China trade war and the pandemic impact, countries are more emphasizing the stability of industrial chains and supply chains, and paying more attention to the development of their own industries. First, the US significantly increased tariffs on China's strategic industries, and then Europe conducted anti-subsidy investigations on China's electric vehicles and green industries. In the future, it is possible that there will be a rebound in the global south.
Third, the sense of gain for the public. The ultimate goal of developing the economy is to improve the welfare of residents, and consumption is a manifestation of the sense of gain. Last year, the export price index decreased by about 2%, and in the first half of this year, it decreased by more than 5%. Instead of subsidizing overseas consumers or lowering prices to offset tariffs, it is better to improve the welfare of the people.
How to boost consumption? I think this first requires a new understanding of consumption and avoiding the "paradox of thrift". Consumption is also an investment, especially in human capital, and investment is delayed consumption - it cannot be delayed indefinitely. To promote the rebalancing of consumption, it may also mean re-examining the policy approach of "trickle-down economics": it is better to directly stimulate consumption than to transmit from exports and investments to consumption. Specifically, I have a few suggestions here:
First. Effectively promote development, this "top priority". Faced with external uncertainties, risk prevention is important, but "no development is the greatest insecurity", development is the key to solving all of China's problems - including consumption. Only when the economy develops can consumption have a source of vitality.
Second. Let residents' income growth exceed the nominal GDP growth rate. Consumption is a function of income. To expand consumption on the expenditure side, it is necessary to increase the proportion of residents' income distribution on the income side, especially the proportion of labor remuneration in the initial distribution. I suggest that our country learn from the experience of Japan's Ikeda cabinet in the 1960s to formulate a "national income doubling plan", more clearly include income growth in the policy evaluation system, and mobilize all parties to boost residents' income. In terms of policy, a dynamic adjustment mechanism for employee wages can be introduced to ensure that wage growth can at least keep up with inflation. At the same time, it is necessary to revitalize the private economy and the confidence of entrepreneurs, after all, they create 80% of employment. Allowing private enterprises to have fair treatment in market access, factor use, and policy support, and avoiding selective law enforcement is the first step. A market-oriented, rule-of-law business environment and a predictable, stable, and consistent policy environment are even more important. Strengthening the protection of property rights and the legitimate rights and interests of entrepreneurs should also be an important part.
Third. Strengthen the social safety net. The space for expanding the proportion of residents' income distribution is inevitably limited, as it will squeeze the shares of enterprises and the government. Wage growth will erode the competitiveness of enterprises, and the manufacturing industry is still a strategic pillar of our country. A lot of government spending is also rigid. However, the rebalancing of consumption can also be achieved by reducing the savings rate. I calculated that the savings rate of urban residents in our country last year was 36% (about 4.5% in the United States), and there is a huge room for reduction, and the premise is a more perfect social safety net. For example, to develop the silver economy, it is necessary to solidify pension accounts. This year's pensions can still rise, and in the next ten years, as the "baby boom" generation retires, the pressure on pensions will further increase, and we need to make arrangements in advance. We should also establish a housing system suitable for a consumption society. Expanding the supply of affordable housing through government repurchase and other forms can reduce "housing savings", but in addition to central bank refinancing, as a public good, fiscal participation is indispensable. A multi-pronged approach to stabilizing the commercial housing market is also a necessary condition to avoid negative wealth effects and boost consumer confidence. If the government's income distribution ratio is not expanded, then its expenditure structure needs to shift more from infrastructure investment and industrial subsidies to people's livelihood.
Fourth. Vigorously subsidize childbirth. High child-rearing costs are the main reason for the decline in fertility rates. For example, the childcare rate for infants and young children in our country is only 5.5%, while developed countries generally exceed 50%. More than 80% of infants and young children in China are cared for by parents and grandparents, and they are overwhelmed by the second and third children. For example, the per capita living area in our country is 42 square meters, and the housing prices in the first, second, and third lines are about 44,000, 13,000, and 9,700 yuan per square meter, respectively. The cost of increasing a family member's living area is about 1.84, 0.56, and 0.41 million yuan, respectively. Therefore, childbirth subsidies must be large enough to reverse the trend and avoid the risk of falling into a "population emergency" like South Korea. Last year, there were 9.02 million newborns, and if each person received a one-time subsidy of 360,000 yuan (equivalent to 20,000 yuan per year before the age of 18), it would be 3.2 trillion yuan a year, equivalent to 2.6% of GDP; in comparison, our country's infrastructure investment exceeds 17 trillion yuan a year. Even within the existing fiscal framework, there is room for adjustment. However, I think a better approach is to expand the long-term special government bonds to raise incremental funds for long-term population strategic investment, and the multiplier effect will be greater.Fifthly, awaken the value of land. I have conducted calculations, and the wealth of rural land can reach 150 trillion yuan, with an average of nearly 200,000 yuan per household registration. The disposable income of urban residents is 2.4 times that of rural residents, partly because the former has more property income. Cities have mature land and real estate markets, while rural land and real estate are largely non-tradable. Allowing the use rights of farmers' land, especially the use rights of homesteads, to flow, trade, and mortgage in a broader range can effectively release the value of rural land. It will also further promote urbanization, enabling new citizens to afford the cost of living and housing after settling in cities. In addition to the wealth effect, market-oriented land rights also help rural residents obtain consumer credit and other financial services.
Sixthly, break through the limitations of consumption scenarios. It is still necessary to establish a market-oriented principle and reduce unnecessary administrative intervention in consumer behavior. For example, the purchase restriction on commercial housing has been relaxed, and I believe it will be further relaxed in the future. Many people believe that China's per capita living area has approached the level of developed countries, so the demand for housing has been basically saturated. If according to the current living pattern, this judgment may be fine; however, looking at countries around the world, many countries with a higher population density than China, most residents also live in multi-story or detached houses. Therefore, opening up our thinking, there is still a lot of room for improvement in our living conditions. For example, the central government now requires the restrictions on cars to shift from purchase management to usage management, which will also release more consumption potential.
Finally, what I am talking about here is "rebalancing," not that investment is not important. On the contrary, I believe investment is very important. I have been to many emerging market countries for research, and some places are spending money on consumption before elections and contracting fiscal policies after elections, lacking long-term investment, and the economy falls into a constantly recurring "consumption trap," making it difficult to grow. We have already made a lot of investments in the early stage, and now we have the conditions and necessity to tilt towards consumption.