Photographer: Qilai Shen / Bloomberg
Photographer: Qilai Shen / Bloomberg
The Chinese Communist Party’s new pledge to restore the “demand side” of the economy has raised expectations that leaders will adopt a more egalitarian policy to boost consumer spending.
The main leaders of the party first used the phrase “demand-side reform” this month, as a departure from the earlier focus on “supply-side” changes, which require industrial improvement and capacity reduction in inflated sectors.
While China is the only major economy to grow this year thanks to effective pandemic management, the new slogan indicates that the ruling party is concerned about the uneven recovery in which household spending is lagging behind real estate and infrastructure investment. Beijing hasn’t detailed what the phrase means, but officials have dropped hints and economists have been quick to make suggestions.
The workers’ share is stagnating
Efforts to rebalance the economy have not yet paid off
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 investment, consumer spending and any trade surplus. Beijing turned to investment to replace exports as the engine of economic growth during the 2008 financial crisis when overseas orders slowed, and has since struggled to rebalance demand with consumer spending.
Economists blame this imbalance on several factors, including wage inequality, which means that income accrues to wealthier households who are less likely to spend, and the relatively high proportion of gross domestic product paid to capital owners as profit rather than as income. wages to employees.
Top officials, including President Xi Jinping and Deputy Prime Minister Liu He, have drawn attention to these issues this year. In a Speech published in August, Xi spoke of the low share of wages in GDP and “outstanding problems in income distribution” and quoted French economist Thomas Piketty’s “Capital in the 21st Century” demonstrating the damaging effects of inequality. Liu has called for improvement of mechanisms increase wages.
What Bloomberg Economics Says …
“In the short term, the goal is likely to be to boost domestic demand with public consumption and investment. The longer-term policy will aim to stimulate a structural shift in household consumption towards products and services with a higher added value. “
– David Qu, economist
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After an annual economic planning meeting this month, the party comes pledged to “optimize the income structure and expand the middle income group”. The Shanghai city government included a “fair” distribution of income in its next five-year plan, including ‘regulating over-incomes’.
This requires more government intervention through taxation, say some government-affiliated economists. “When a country has a higher income level, the government will step up efforts to redistribute income through taxation and remittance,” said one speech in August by Cai Fang, vice president of the Chinese Academy of Social Sciences, an influential government think tank.
Specific measures may include increasing income tax for the rich, providing income taxes to lower earners, levying taxes on assets such as real estate, and levying capital gains charges on financial transactions, most of which are tax exempt.
“I think the income tax is already quite progressive. The key is the capital gains tax, ”said Gan Li, director of the Survey and Research Center for China Household Finance at Southwestern University of Finance and Economics in China.
Social prosperity
Beijing has sworn major gaps in quality and coverage of public services such as healthcare and education across regions. Shifting government spending towards such services could encourage households to save less of their income and spend more on goods and services.
“China’s social security expenditure is about 10% of GDP, which is much lower than 19% in Europe. Going forward, the trend will be to increase investment in the social security system and the structure of fiscal spending will be adjusted, ”stock brokerage analysts Guotai Junnan wrote in a report on demand-side reforms.
The reform of the resident registration system can also improve access to social services. The government came in April said all cities with a population less than 3 million should abolish rules restricting access to government services only to people who are officially registered to live in the city. Similar changes could reduce the cost of social services for millions of people.
Obstacles
With Beijing saying this year it would rely on 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 capital expenditures as it shifts from transportation infrastructure and housing to technology and environmental projects.
However, any shift in emphasis is likely to occur gradually.
Beijing is struggling to move forward with a real estate tax it has been planning for more than a decade resistance of the wealthy and fears of falling asset prices. And the recent Communist Party meeting stated that supply-side reforms would remain the “main line” of policy.
“Chinese policymakers have been talking about increasing 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 didn’t make it happen.”