Photographer: Qilai Shen / Bloomberg
Photographer: Qilai Shen / Bloomberg
The Chinese Communist Party’s new promise to correct the “demand side” of the economy has given rise to expectations that the leadership will implement more egalitarian policies to stimulate consumer spending.
The party’s top leaders used the term “demand-side reform” for the first time this month, deviating from its previous focus on “supply-side” changes involving industrial upgrading and capacity reduction in inflated sectors.
Although China is the only major economy to grow this year due to its effective control of the pandemic, the new slogan signals that the ruling party is concerned about the uneven recovery, with household spending lagging behind in real estate investment and infrastructure. Beijing has not detailed what the term means, but officials have dropped tips, and economists have been quick to make suggestions.
The share of workers is stagnating
Attempts to balance the economy have not borne fruit yet
Source: Sources: University of Groningen, University of California, Davis, via Federal Reserve Bank of St Louis’ FRED database
Redistribution of income
The term “demand side” is used to refer to investment, consumption expenditure and any trade surplus. Beijing turned to investment to replace exports as a driver of economic growth during the financial crisis of 2008, when overseas orders slowed down, and has since struggled to “rebalance” demand against consumer spending.
Economists blame the imbalance on several factors, including wage inequality, which means that income accrues to richer households who are less likely to spend, and the relatively high share of gross domestic product paid as profits to capitalists rather than as wages to workers.
Top officials, including President Xi Jinping and Deputy Prime Minister Liu He, have raised these issues this year. In a speech published in August, Xi spoke about the low share of wages in GDP and “outstanding problems in income distribution” and quoted the French economist Thomas Piketty’s “Capital in the 21st Century”, which showed the detrimental effects of inequality. Liu har called for the improvement of mechanisms for increase wages.
What Bloomberg Economics says …
“In the short term, the goal is likely to be to increase domestic demand through public consumption and investment. Long-term policies will aim to spur a structural shift in household consumption towards higher value-added products and services. ”
– David Qu, Economist
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After an annual financial planning meeting this month, the party promised to “optimize the income structure and expand the middle income group.” The Shanghai city government included a “fair” income distribution in its next five-year plan, including “regulation of excessive income.”
This will require more government intervention through taxes, say some finance executives affiliated with the government. “When a country has a higher income level, the government will intensify the income distribution efforts with taxation and transfer payments,” according to a speech in August by Cai Fang, vice president of the Chinese Academy of Social Sciences, an influential government thinker.
Specific measures may include raising income tax on the richest, providing income tax credits to lower wage earners, introducing property taxes such as property and collecting capital gains taxes on financial transactions, most of which are tax-exempt.
“I think the income tax is already quite progressive. The key is capital gains tax, ”said Gan Li, director of the Survey and Research Center for China Household Finance at China’s Southwestern University of Finance and Economics.
Social welfare
Beijing has promised to reduce the major gaps in the quality and coverage of public services such as health care and education between different regions. Moving government spending on such services can encourage households to save less of their income and spend more on goods and services.
“China’s spending on social security is approx. 10% of GDP, which is much lower than 19% in Europe. In the future, there will be a tendency to invest more in the social security system, and the structure of fiscal spending will be adjusted, ”wrote securities broker analysts Guotai Junnan in a report on the demand side reform.
The reform of the resident registration system can also increase access to social welfare. In April the government said all cities with populations less than 3 million should abolish rules that only restricted access to public services to people officially registered to live in the city. Similar changes could reduce the cost of social services by millions upon millions.
Obstacles
When Beijing this year said it would trust onestrategy for dual circulation, where economic growth becomes more and more dependent on domestic demand rather than exports, economists expect the government to maintain a high level of investment while shifting away from transport infrastructure and housing towards technology and environmental projects.
However, any change in weight is likely to occur gradually.
Beijing has struggled to move forward with a property tax it has been planning for more than a decade because of resistance from the wealthy and fears of falling asset prices. And the recent meeting of the Communist Party declared that supply-side reforms would continue to be the “most important line” in politics.
“China’s makers have been talking about rising consumption and demand-driven growth for decades,” he said. Terry Sicular, a China-focused economist at Western University in Canada. “But all the talk about it has not made it happen.”