Raising incomes should be focus in boosting consumption

大众网2025-02-11 11:06:50

　　Shoppers seen at a supermarket in Zaozhuang, Shandong province. [SUN ZHONGZHE/FOR CHINA DAILY]

　　For China, boosting consumption has become as important a task as enhancing innovation and competitiveness. Policymakers have taken the expansion of consumption to unprecedented heights on the development agenda, reflecting the urgency of figuring out solutions for Chinese consumers to maintain strong spending power in the long term, rather than just a short-term stimulus that can only trigger a temporary uptrend.

　　For the world's second-largest economy, boosting consumption is beneficial and a necessity. However, it is challenging. With industrialization and urbanization levels at historic highs, the main issue faced by the country's development has changed from insufficient supply and production capacity in the past, to systemic insufficient demand, such as the overcapacity in housing — which has been a major issue in recent years. The nation needs stronger consumption power to form its high-quality internal circulation development pattern with consumption-driven investments and free from major impacts created by restrictive moves of other nations.

　　To this end, China's five-year plan entering a new stage offers an opportunity for policymakers to bring changes in making development plans, with a focus shift away from industry and more toward consumption, which will involve a profound transformation in the framework, priorities and development concepts of the policy system.

　　Root cause

　　It's known to many that consumption is deemed one of the "troikas" that drive the economy, but from the perspective of the law of economic development, consumption is always the ultimate goal of economic activities. Investment is also essential to serve future consumption.

　　After the industrial revolution, capitalization and socialized large-scale production have become the basic characteristics of developed economic systems, and the industrial chain has been lengthened, drastically expanding the proportion of upstream and intermediate capital goods. However, the ultimate value realization of upstream and midstream still depends on downstream consumption. As the modern industrial system gets increasingly complex, the signal transmission from the consumer goods market to the supply side is like "detouring" in the market and may not be completed in a timely manner, making it lead more easily to issues of overcapacity, insufficient demand, or even financial crises in some serious cases.

　　This is especially true for late-developing industrialized economies. For those, such as Germany and Japan after World War II, the time for research and development is less, and the original capital can be accumulated at a quicker pace, giving them the edge to take on the global market with lower factor costs. Such countries also experienced more or less of an overcapacity issue and financial crises in a certain period of their late stages of industrialization.

　　In order to solve the problem of overcapacity or insufficient domestic demand, such countries either vigorously develop the tertiary industry — mainly real estate and finance — to absorb production internally, or further globalize to occupy more external markets. But both paths have encountered challenges, with the former overdevelopment triggering a financial crisis due to the bursting of the housing bubble, and the latter triggering trade wars and even deeper conflicts between countries.

　　At present, China's economy is also facing challenges alike. On the one hand, China — which boasts the largest industrialized capacity — is seeing its industrial output take up 40 percent of the global total. On the other hand, its consumption capacity ranks far lower compared to the size of its economy, with its share of consumption in GDP below the world average. This is a natural result of a nation achieving a higher development level, a necessary stage for post-industrialized countries, and a pure reflection of an objective law.

　　To conclude, long-lasting weak demand is a manifestation of the contradiction between the rapid increase in productivity and the relative lag in the evolution of production relations and a status where a country's consumption power cannot keep up with its productivity and innovation capability. Additionally, for China, speaking in terms of policy framework, the country has been adopting approaches of stimulating investment to boost demand for a long time, and has not accumulated much practical experience in expanding consumer demand, which is also a reason for its relatively weak consumption and less-than-expected policy effect on the sector.

　　Key role

　　China has become the largest economy in terms of industrialization and electrification as well as the largest automaker. However, these are the sectors in which growth mainly depends on external demand. And once there is turmoil in the external market, exporters are expected to suffer issues such as backlogs of goods, performance losses, debt defaults, layoffs and salary cuts. In serious cases, there could be even a lot of bankruptcies, triggering a systemic economic crisis and undermining the country's economic security.

　　Looking back at the first three quarters of 2024, consumption's contribution to China's GDP growth was less than half — a sharp decline from the same period in previous years. The contribution of exports stood high last year, which means that China's economic growth last year was still largely driven by external demand, which could be vulnerable in the context of the current global economic cyclical decline, a potential new round of trade wars and increasingly tense geopolitical conditions globally.

　　Therefore, more efforts are needed to spur the contribution of consumption in economic momentum and make consumption the "ballast stone" of China's economic growth. The nation should maintain a dynamic balance between supply and demand based on the internal circulation pattern, drive effective investment with consumption and inject impetus into consumption with the fresh supply brought by the effective investment, to ultimately ensure the sustainability of its internal circulation.

　　Way out

　　Unlike investments, which can be more easily boosted by deficit stimulus, expanding consumption is a complex process of policy implementation and the transmission afterward. Consumption isn't something that can be easily controlled, especially the consumption of households. To expand consumption in the long term as the ultimate goal, the government can set intermediate goals such as raising income levels, because the final decision on consumption is still in the hands of micro entities.

　　Speaking further of this issue, how can China enhance its overall consumption power? One major solution is, of course, to increase people's disposable income. First, in terms of distribution structure, more income should be directed to households, because they are the main force of consumption. Measures could be, but not limited to, reducing the proportion of government accumulation in residential incomes, such as social insurance and the housing fund. In terms of income structure, it is also necessary to attach importance to the increase of property income.

　　The other basis is to improve consumer confidence and eliminate consumer concerns over consumption as much as possible. In view of developed countries that have established a consumption-oriented economy, the premise of improving consumption power is that the government will "buy out" people's precautionary savings, that is, the social security programs will free people's precautionary savings, and people will no longer worry about the future, and most of the income obtained will be used for current consumption.

　　To this end, first, the government can transfer part of the budget for infrastructure investment to social security; second, the nation's deficit can be appropriately expanded to boost consumption, while ensuring that money is spent scientifically and appropriately for people's livelihood and social security.

　　With the increase in consumption, economic recovery may gather pace and tax revenues will also rise accordingly. Additionally, the government will have more financial resources to improve the level of social security and people will have more confidence to spend money and consume, so that the entire economy will form a benign and self-consistent internal circulation.

　　A more long-term approach is to shift the policy focus from industrial planning to consumption planning, which could be implemented in the upcoming the 15th Five-Year Plan (2026-30). It is necessary to focus on raising incomes, improve social security and increase investments in public goods such as healthcare, education and pensions to improve the foundation of consumption.

　　The writer is head of a research institute at Atlantis Investment, a Hong Kong-based asset management company. This op-ed is a translated version of an article by the writer published on the WeChat official account of China Chief Economist Forum, a think tank.

　　The views do not necessarily reflect those of China Daily.