(Yicai Global) Dec. 19 -- China’s economic agenda will focus on boosting domestic demand next year, the Central Economic Work Conference said last week. So how should we see the importance of consumption in stabilizing growth, and what should be done to boost consumption?
China’s consumption was weak this year due to the effects of the Russia-Ukraine conflict, the Covid-19 pandemic, and high global inflation. Total retail sales of consumer goods were CNY40 trillion (USD5.7 trillion) from January to last month, down 0.1 percent from a year ago, per data from the National Bureau of Statistics. Retail sales excluding autos were CNY35.85 trillion, down 0.2 percent -- and the fall would be bigger if adjusted for inflation.
The long-term factors driving consumption this year have not looked promising. The growth of personal incomes is generally closely correlated to that of gross domestic product, and the Chinese economy is not likely to rise significantly next year, so it is hard to see consumption rising fast under these circumstances.
Here are three suggestions to boost consumption from the perspectives of the government, enterprises, and residents.
First, increase national financial support for residents and boost the share of household disposable income in GDP. According to NBS data, the share of household disposable income in GDP has been around 45 percent over the past few years compared with a global average of about 60 percent, which is a major reason why the contribution of the country’s consumption to GDP is relatively low.
China could cut the financial burden of education and healthcare on residents by raising the social security level and thus driving savings down and raising consumption.
The government could also issue CNY1.5 trillion (USD215 billion) in special government bonds and CNY1,000 (USD143) per capita consumption coupons to citizens next year. Based on previous experience, the coupons would result in CNY4.5 trillion in spending, which would allow total retail sales of consumer goods to jump more than 10 percent next year.
Second, hike residents’ income via multiple channels to bolster consumer confidence. The country needs to support the development of the capital market, encourage institutional investors to inject long-term funds into the market, and increase the proportion of foreign capital in the market under the national opening-up policy.
Third, encourage high-income groups and enterprises to give back to society, including through voluntary gifting and charitable donations. The per capita income of high-income groups that make up the top 20 percent of China’s population is more than 10 times that of low-income groups which make up the bottom 20 percent, per NBS data. So, it is necessary to develop charity and encourage the rich to donate.
Social donations made up 0.2 percent of the nation’s GDP last year, compared with 2.3 percent in the United States. Encouraging such donations would raise the income of low- and middle-income groups and thus boost consumption.
Raising the income of low- and middle-income groups can not only change the current weak demand situation, but also boost confidence and reverse the gloomy expectations. It is more in line with the underlying logic and more helpful to sustain steady growth for the country to allocate more financial resources to residents than to enterprises.
The contribution of the nation’s capital formation to GDP is still around 40 percent, about twice the global average. To achieve the goal of hiking consumption, it will be necessary to raise the average contribution of consumption to GDP to between 65 percent and 70 percent and lower the average contribution of capital formation to GDP to between 25 percent and 30 percent.
(The author is chief economist at Zhongtai Securities.)
Editors: Shi Yi, Tom Litting