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Time for China to spend more and save less



The atmospherics surrounding the recent National People’s Congress all came down to one question: when exactly will China become the world’s biggest economy?

Communist Party leader Xi Jinping didn’t offer a specific answer. But it’s clear that the new reform team Xi has assembled is accelerating the timeline by prioritizing consumption over investment.

There’s not a moment to waste. For years, economists from East to West knew that China needs to prod consumers to save less and spend more. Unless Xi can pivot to a consumption-driven model, it will delay the moment when China surpasses the US in gross domestic product (GDP) terms – or even forfeit its chance to be No 1.

Chinese households are serious savers. That’s becoming a headwind all its own at a moment when Beijing is less willing to stimulate GDP, local governments are focused on reducing debt and deleveraging, and China’s export engine is facing a rocky global economy.

Generally speaking, China’s 1.4 billion people save about one-third of their income. That’s roughly three times the average of American consumers. Deploying that cash is the key to China becoming a domestic demand-led powerhouse.

Consumption is the key to allowing Beijing to throttle back on fiscal policy and local governments to rely less on leverage. And it’s central to phasing out the gigantic shadow-banking system and letting the People’s Bank of China withdraw massive stimulus from the economy.


The need for a recalibration from over-investment to consumption was well known even before Xi rose to power in 2012. So is the need to create broader safety nets across sectors. But time and time again, the hard work of engineering it took a backseat to short-term considerations.

In each of these episodes, the tendency has been to pour more public works spending into new infrastructure and property. These investments in hardware come at the expense of the economic software needed to raise China’s competitiveness.

That happened after the 2008 global financial crisis. Delay was the response to the 2013 Federal Reserve “taper tantrum.” The same with the chaotic summer of 2015, when Shanghai stocks lost a third of their value in just three weeks.

The Covid-19 pandemic deadened Beijing’s reformist instincts. In fact, it was at the height of the pandemic that Xi began his clampdown on Big Tech, starting with Alibaba Group’s Jack Ma. The Fed’s most aggressive tightening cycle since the mid-1990s hardly helped.

Now, as China reopens from the Covid era, Xi’s government is finding that the consumption rebound isn’t delivering what Beijing hoped. The 3.5% rise in retail sales in the January-February period hardly constitutes a “big boom,” says economist Johanna Chua at Citigroup.

This points to the limits of the economic model that’s gotten China this far.

“China now knows that if it’s going to achieve its growth, it has to achieve it domestically, which means reform which is not yet undertaken And it means getting the consumer to spend pots of excess savings, which it is very hesitant to do,” says David Roche, president of advisory Independent Strategy.


It falls to Xi’s new reform leader, Premier Li Qiang, to break through that hesitancy. The urgency for action can be seen in the mixed signals in recent economic data. Case in point: the muted 1% rise in consumer prices in February, which seems out of step with a recovering economy.

This dynamic “casts doubt on the strength of domestic demand recovery in the household sector,” says Zhiwei Zhang, president of Pinpoint Asset Management. “It is puzzling to me as it contradicts with other data points that suggest the recovery of domestic demand is quite strong.”

There’s an argument that the economic drag from trade tensions with the US provides a partial explanation.

“Additional measures by Western countries to restrict investment flows to China, block access to technology, restrict market access for China’s firms, and promote diversification policies, could continue to weigh on foreign investors’ risk perception regarding doing business in China,” Moody’s Investors Service says in a report. “These measures also have the potential to weaken China’s economic outlook.”

All this is refocusing government efforts on the need to ensure consumption plays a bigger role in driving the economy, Li Chunlin, a vice chairman of the National Development and Reform Commission, told reporters.

Li repeated the government’s mantra that consumption should play a “fundamental role” in expanding domestic demand and growth. That, he added, will reduce the need for massive government-directed debt-driven infrastructure investment.

“We are confident and capable of ensuring the implementation of policies to promote consumption this year, so that it will make a greater contribution to achieving the GDP growth target of around 5%,” Li said.


The NDRC’s goal is to stabilize sales of big-ticket products, hasten rural consumption, boost household income and increase demand for better housing, electric cars and elderly care.

Even more importantly, notes economist Iris Pang at ING Bank, the government is emphasizing the “importance of technology and ESG to long-term growth. Within ESG, green industries still get more attention from the government.”

These two industries, Pang says, “will attract more capital for investments from government support measures as well as from the private sector. So, apart from a consumption recovery, we should give more attention to investments in these two areas. Growth rates in these industries should be high.”

This could get Premier Li closer to reinvigorating the private sector and creating new higher-paying jobs.

The alternative is becoming unthinkable. The International Monetary Fund (IMF) warns that mainland growth could be capped at 4% starting in 2025 unless economic engines are recalibrated away from the state sector.

As IMF economist Thomas Helbling says, the “prioritization of spending on households over investment would also deliver larger stabilization benefits. For example, means-tested transfers to households would boost aggregate demand 50% more than an equivalent amount of public investment. To ensure consistency across policies, fiscal policy should be undertaken within a medium-term fiscal framework.”

Among the IMF’s recommendations are bold steps to lift productivity growth and accelerated rebalancing efforts toward sustainable, less investment-driven growth. A comprehensive set of structural reforms could lift GDP levels by around 2.5% over the medium term and 18% over the long term, the IMF reckons.


Combined with moves to re-orient fiscal resources toward household support, domestic consumption would increase significantly, with the private consumption share of GDP rising by 18 percentage points by 2037.

Helbling says this growth — estimated at an average in the 4% range over the medium and long term — would “be less risky” and accompanied by a reduction of the augmented general government debt burden from 173% to 146% of GDP by 2037.

Point is, Helbling notes, state-owned enterprises “have played their due role in economic and social development and have made positive progress in reform and development.” As such, it’s the private sector’s turn to take the lead.

A trickier challenge is changing the collective consumer mindset in a sprawling economy, says economist Zhang Jun at Fudan University. That’s the key to prodding Chinese households to save less.

“A very large proportion of the increase in deposits reflects what households choose to save as a precaution,” Zhang says. “Chinese households save mainly in the form of housing and financial investment, and last year they delayed home purchases and pulled out of the stock market and other underperforming financial assets in favor of keeping their money in bank deposits.”

It’s an added challenge that nearly 230 million Chinese will retire over the next 10 years. Xi’s government rightly fears demographics will drag down economic growth, and exponentially so.

Hence the urgency to act on a big reset of the party’s relationship with the private sector. Given that it generates 60% of GDP and about 80% of employment, its role is crucial in pivoting to a pro-consumption growth model.


Possible options include the national government and municipalities handing out consumption coupons to households — for both goods or services. Reversing curbs on the tech sector would turn a headwind into an economic tailwind and increase good-paying job opportunities for recent graduates.

Premier Li’s team could also take a page from Japan’s failures. Japan spent 20 years targeting inflation when it should have been targeting wage gains. Rather than targeting a GDP level, China might be better off aiming at a certain level of per capita income.

At the moment, the ratio of household income as a share of GDP is 62%. The goal should be to get that ratio closer to the 80% level in the US.

Most important of all, perhaps, is that Xi’s government, through its actions, convinces the Chinese masses to open their wallets – and hasten China’s path to No 1. 

Follow William Pesek on Twitter at @WilliamPesek

Source: Asia Times


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