Photographer: Qilai Shen / Bloomberg
Photographer: Qilai Shen / Bloomberg
The Chinese Communist Party’s new promise to fix the “demand side” of the economy has raised expectations that the leadership will implement more egalitarian policies to stimulate consumer spending.
The main party leaders used the phrase “demand side reform” for the first time this month, in a departure from its earlier focus on “supply side” changes that involve modernizing the industry and cutting capacity in bloated sectors.
Although China is the only major economy that is expected 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 in which household spending has lagged behind investments in real estate and infrastructure . Beijing did not elaborate on what the phrase meant, but officials gave suggestions and economists were quick to offer suggestions.
Worker participation stagnates
Attempts to rebalance the economy have yet to bear fruit
Source: Sources: University of Groningen, University of California, Davis, via the Federal Reserve Bank of St Louis FRED database
Income redistribution
The term “demand side” is used to refer to investments, consumer spending and any trade surplus. Beijing turned to investment to replace exports as a driver of economic growth during the 2008 financial crisis, when orders abroad slowed and, since then, has struggled to “rebalance” demand in relation to consumer spending.
Economists attribute this imbalance to a number of factors, including wage inequality which means that income accrues to wealthier families who are less likely to spend, and the relatively high share of gross domestic product paid as profits to capital owners, rather than wages to workers.
Senior officials, including President Xi Jinping and Vice Premier Liu He, have drawn attention to these issues this year. On a In a speech published in August, Xi spoke about the low share of wages in GDP and “outstanding problems in the distribution of income” and cited “Capital in the 21st Century”, by French economist Thomas Piketty, as showing the harmful effects of inequality. Liu has called upon to improve mechanisms for increase wages.
What the Bloomberg economy says …
“In the short term, the goal is likely to be to boost domestic demand with consumption and public investment. Long-term policies will aim to stimulate a structural shift in household consumption towards higher value-added products and services. “
– David Qu, economist
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After an annual economic planning meeting this month, the party promised to “optimize the income structure and expand the middle income group”. The Shanghai city government has included a “fair” income distribution in its next five-year plan, including “excessively high rent regulation”.
This will require more government intervention through taxes, say some government-affiliated economists. “When a country has a higher level of income, the government intensifies efforts to redistribute income through taxation and transfer payments,” according to one August speech by Cai Fang, vice president of the Chinese Academy of Social Sciences, an influential government study group.
Specific measures may include raising income tax on the wealthiest, providing income tax credits to those who earn less, imposing taxes on wealth such as property, and charging capital gains charges on transactions most of which are tax exempt.
“I think that the income tax is already very progressive. The key is capital gains tax, ”said Gan Li, director of the China Home Finance Research and Research Center at the Southwest China University of Economics and Finance.
Social welfare
Beijing has pledged to reduce the large gaps in the quality and coverage of public services, such as health care and education between different regions. Transferring government spending to these services could encourage families to save less on their income and spend more on goods and services.
“China’s social security spending is around 10% of GDP, which is much less than 19% in Europe. In the future, there will be a trend to invest more in the social security system, and the structure of tax expenditures will be adjusted, ”wrote analysts at the securities broker Guotai Junnan in a report on demand-side reform.
The reform of the resident registration system can also increase access to social security. In April, the government He said that all cities with a population under 3 million should abolish rules that limit access to public services only to people officially registered to live in the city. Similar changes could cut direct social service costs for millions.
Obstacles
With Beijing this year saying it would have a “dual circulation strategy ”, in which economic growth will become increasingly dependent on domestic demand, rather than exports, economists expect the government to maintain high levels of investment spending, while shifting from transportation and housing infrastructure to technology and environmental projects.
However, any change in emphasis is likely to be gradual.
Beijing has struggled to come up with a planned property tax for more than a decade due to resistance of the rich and fears about falling asset prices. And the recent Communist Party meeting declared that supply-side reforms would continue to be the “main line” of politics.
“China’s legislators have been talking about increasing demand-driven consumption and growth for decades,” he said. Terry Sicular, a China-focused economist at Western University in Canada. “But all the talk about it didn’t happen.”