Liu Shijin Calling Institutional Opening-up to Promote Consumption
Former State Council Advisor Calls for Institutional Opening-up and Public Service Equality to Drive Consumption Growth
Hello, readers! Today, I'd like to share insights from a speech by Professor Liu Shijin, a distinguished economic policy advisor. He served as an advisor to the People's Bank of China, held the position of Deputy Director at the Development Research Center (DRC) - a key research institution under China's State Council, and was Vice Chairman of the 13th National Committee of the Chinese People's Political Consultative Conference (CPPCC).
Liu delivered the speech at the China Free Trade Strategy Forum hosted by East China Normal University. During the speech, Liu analyzed the issue of insufficient service consumption and how to address this problem through institutional opening-up. He believes that China has largely resolved the issue of basic subsistence consumption, but developmental consumption needs - such as healthcare and social security - cannot rely solely on individuals and require government spending support. The biggest problem lies in the lack of equalization in public services, where migrant workers cannot enjoy equal social services.
At the institutional level, three inequalities need to be addressed:
The inequality in the household registration (hukou) system and its associated identity and residence mobility rights
The inequality in access to basic public services
The inequality in property rights, particularly regarding real estate
From a macroeconomic perspective, the domestic demand issue can only be truly resolved through a combination of short-term stimulus and long-term structural reforms, where short-term stimulus buys time for structural reforms to take effect. Trump's presidency presents an opportunity for China to open up and champion globalization. Specifically, he suggests that the service sector should learn from the manufacturing sector by shortening the negative list and proactively expanding opening-up to the outside world, thereby promoting domestic reform through opening-up.
Below is the translation I made based on the transcript published in Tsinghua Financial Review. https://news.qq.com/rain/a/20241123A06WV400
Today, I'll discuss China's current macroeconomic situation, focusing on the challenges of insufficient demand in our economic development, particularly in service consumption, and how institutional opening-up might address these issues.
Economic Recovery Shows Promise, but Demand Remains Weak
While China's post-pandemic economic recovery over the past two years has been uneven, the overall trend is positive. Our growth rate of 5.2% last year ranked favorably among major global economies. However, we've seen a gradual slowdown in quarterly growth this year: from 5.3% in the first quarter to 4.7% in the second quarter, and 4.6% in the third quarter. This downward trend indicates significant pressure on economic growth. Though the central government's target of around 5% growth this year is achievable with substantial effort, the more critical question is what growth rate we can sustain in the coming year and beyond, and what key challenges we face.
Total demand has been declining over the past two years. A key macroeconomic indicator, the GDP deflator, has shown negative growth for seven consecutive quarters - the longest such period since China's Reform and Opening-up began. The Central Government has taken this seriously, with the Politburo holding a dedicated meeting on September 26 to analyze the economic situation. Several key central government departments have since introduced additional stabilization policies. However, we need to understand both the implications and root causes of this insufficient demand. While these issues are interrelated, it's crucial to clearly identify the factors driving this demand shortage.
Boosting Effective Consumer Demand: Understanding New Consumption Patterns
Current insufficient aggregate demand primarily stems from weak consumer spending, particularly in the services sector.
The Transition from Subsistence to Development-Oriented Consumption
What constitutes subsistence consumption? It primarily involves basic necessities - food, clothing, and other essential goods. China has largely addressed these basic needs. However, the key question now is: Where will future consumption growth come from? The answer lies in structural upgrading and new categories of consumption. This primarily includes development-oriented consumption: education, healthcare, affordable housing, social security, culture, sports, entertainment, financial services, and transportation and communications.
From a comparative international perspective, China's current shortfall in consumption mainly lies in services. Final household consumption accounts for less than 40% of China's GDP, compared to 67% in the United States - a gap of about 29 percentage points. Major developing Asian economies also maintain ratios roughly 20 percentage points higher than China.
Service consumption as a proportion of GDP tells a similar story: China stands at approximately 26%, significantly below the U.S. at 55%, and the average of major developing Asian economies at 33%. This indicates that China's low consumption levels represent a structural rather than marginal issue, requiring deeper analysis.
The Role of Public Services in Development-Oriented Consumption
There's a fundamental difference in how subsistence and development-oriented consumption are realized. While subsistence consumption is primarily individual (like food and clothing purchases), development-oriented consumption often involves collective or public service delivery mechanisms. Healthcare and social security operate on mutual assistance principles, education is delivered collectively, and the level and equality of basic public services are closely tied to development-oriented service consumption. Individual effort alone is insufficient - government infrastructure, institutional frameworks, and funding are essential, requiring a combination of government and household expenditure.
While the government has made progress in equalizing basic public services over the years, overall development has lagged, directly constraining growth in development-oriented consumption. Urban residents frequently cite three major concerns: education, healthcare, and affordable housing. However, the most significant deficits affect the nearly 300 million migrant workers, particularly the approximately 200 million who have moved to cities. In major cities like Beijing and Shanghai, delivery workers and food service employees - predominantly migrant workers - have lived in these cities for years or even decades, with second and third generations emerging, yet their public service needs remain unaddressed.
China currently has 400 million middle-income individuals and 900 million lower-income individuals. Traditional comparisons using disposable income alone understate the actual inequality; when accounting for government-provided basic public services, the disparity becomes even more pronounced.
Certain metrics illustrate this issue clearly. While China's economic affairs expenditure as a percentage of GDP exceeds that of the UK, Germany, Japan, and the US, its healthcare spending ratio is the lowest among these countries. Similarly, China's first-pillar pension spending as a percentage of GDP remains comparatively low.
Let me share some additional statistics. In 2021, the average monthly pension for retired government and public institution employees in China was around 6,000 yuan, while retired enterprise employees received approximately 3,000 yuan - half as much. Then, rural residents and individual business owners participate in the rural and urban residents' pension scheme (comprising 95% rural residents and 5% urban individual business owners). What is their average monthly pension? Just 190 yuan, not even 200 yuan. Moreover, a significant number of migrant workers, flexible employees, and workers in new forms of employment aren't even covered by social security - they remain outside the system entirely. To put this in perspective, the pension gap between government/public institution retirees and rural residents is 31-fold, while the gap between enterprise retirees and rural residents is 15-fold.
From an international perspective, China's total pension assets amount to 10% of GDP, compared to 124% in the UK and 74% in Japan. The per capita disparity is substantial. This inadequate social security system constrains service consumption growth, particularly in development-oriented consumption areas.
Service Consumption's Dependence on Economies of Scale and Agglomeration Effects
This directly correlates with urbanization levels. Consider basic infrastructure like water and sewage systems: in villages with dispersed populations, costs are prohibitively high, while urban areas benefit from significantly lower per-capita costs. This brings us back to a fundamental question: Why urbanize? Urbanization creates agglomeration effects, increases population density, and achieves economies of scale. The same principle applies to development-oriented consumption and services. To achieve high-quality education and healthcare - with access to skilled doctors and teachers - we need to move beyond not just rural areas but also county-level cities, where standards remain relatively low. This necessitates promoting higher-level urbanization and developing metropolitan clusters and urban agglomerations.
Economies of scale represent a fundamental economic principle. Traditionally, we've discussed economies of scale in the context of production, focusing on industrial agglomeration effects and urbanization. However, the consumption sector, particularly service consumption, equally requires economies of scale and sufficient density. Without adequate urban density, high-quality basic public services - including education, healthcare, affordable housing, social security, elderly care, culture, and entertainment - remain inaccessible and difficult to implement.
Compared to developed countries at similar stages of development, China's urbanization rate remains relatively low. Other countries typically exceed 70%, with some surpassing 80%. China's current urbanization rate is 66% for the resident population but only 48.3% for the registered household population, with many receiving inadequate basic public services.
Institutional Constraints on People-Centered Urbanization
There are three major inequalities constraining people-centered urbanization between urban and rural areas:
The household registration (hukou) system and its associated disparities in identity and mobility rights
Unequal access to basic public services
Property rights inequality, particularly regarding real estate
For example, China's land system is exclusively public ownership - either state-owned or collectively owned, with no private ownership. Urban residents can freely trade houses built on state-owned land, while rural residents can only transfer houses built on collective land within their immediate collective organization - typically limited to their village or even smaller residential group. Real demand exists outside these boundaries, but transfers are restricted. This raises an economic issue: the market value and price of the property vary dramatically based on its transferability, credibility, and ability to be used as collateral. During China's split-share structure reform, the price difference between tradeable and non-tradeable shares could be tenfold or even several dozen-fold. Rural residents' property income remains low largely because their land rights are heavily restricted, significantly undervaluing their assets.
Current Priorities for Expanding Consumer Demand
At this stage, expanding consumer demand should focus on three key areas:
Development-oriented consumption backed by basic public services
Middle and low-income groups, particularly migrant workers
People-centered urbanization and urban-rural integration based on equal development rights
Some current approaches to expanding consumption deserve scrutiny. One popular proposal suggests emulating developed countries' "helicopter money" policies. While using consumption vouchers and sales promotions is acceptable, and consumption subsidies can directly impact short-term consumption growth, universal cash distribution methods are questionable - even billionaires could receive payments. Even when targeting low-income groups, who have largely resolved their basic subsistence needs, receiving money to buy a few extra loaves of bread doesn't address their real challenges. For urban low-income groups, primarily migrant workers, the genuine challenges lie in housing, education, healthcare, social security, and pension provision. In face of these challenges, distributed cash payments are merely a drop in the ocean.
Moderate stimulus measures are necessary to stabilize economic growth and prevent short-term negative price-volume spirals. However, stimulus comes at a cost - bigger isn't necessarily better - and requires a medium-term balancing framework. More importantly, stimulus should buy time and space for structural reforms. There's a tendency to focus more on stimulus and less on reform, showing greater interest in stimulus than reform. If we continue in this direction, our problems will remain unsolvable.
We need a combined "stimulus plus reform" approach: spending money to build new systems, clarifying thinking and relationships, setting clear objectives, and combining destruction with construction. Within a relatively short timeframe, we must focus on resolving the deep structural and institutional issues constraining domestic demand, particularly consumer demand. This will create conditions for China's stable and sustained economic growth as it enters a high-income society status.
Expanding Institutional Opening-up to Promote Service Consumption Development
Let's reflect on the evolution of China's opening up. It began with merchandise trade, then expanded to services trade, technology transfer, and management practices. Now, we're entering the era of institutional opening-up. The old mentality of 'Chinese learning for fundamental principles, Western learning for practical application' suggested we could adopt foreign practices but not institutions. Today, regarding high-standard international economic rules like CPTPP, we previously showed resistance due to concerns about state-owned enterprise positioning, environmental standards, and labor protection.
Now we understand that many issues in opening up aren't merely external demands but necessary domestic reforms. What do we mean by a high-quality market economy? “High quality” implies advancing beyond previous standards. Free trade rules build upon WTO standards, representing higher benchmarks. We must align with international standards in this regard. In globalization, like railway tracks, different gauges can't connect. Moreover, we should aim to occupy strategic heights and play a leading role.
This represents an international game theory scenario. Trump's approaches essentially internationalized domestic conflicts, generally moving toward retreat. The U.S. historically maintained protectionist tariffs for extended periods. While additional tariffs might impact us, they also present opportunities. As they retreat, we advance. We should raise the banner of globalization higher and lead this trend, which will be beneficial for both China's development and long-term global growth.
Opening up requires increased foresight, initiative, and leadership. We should expand the service sector opening up and gradually shorten the negative list. Manufacturing is largely open; while services have unique characteristics, we should strive for similar levels of openness. China's service sector is in an ascending phase - greater opening-up benefits us by promoting domestic reform through external opening.
Free trade zones can pioneer these efforts, increasing inclusiveness, allowing for trial and error, developing replicable and scalable experiences and practices, and implementing timely unilateral opening-up based on local conditions. We must maintain a long-term perspective and consider the bigger picture - ultimately, it's advantageous. This requires global vision and long-term planning.
Another point concerns learning. We've recently used the term 'catching up' less frequently, as some believe China already leads globally. Currently, our per capita income is $13,000, with a target of reaching upper-middle-income country levels ($30,000-40,000) by 2035 - a $20,000 gap remains. Developed countries have implemented certain measures that we're capable of but haven't yet adopted. Learning directly from their experience offers low-cost, high-certainty benefits. China also enjoys late-mover advantages in areas like digital economy and green innovation, where gaps are minimal, and we're sometimes parallel or locally leading. This creates opportunities for developing dual competitive advantages through learning and innovation, potentially generating new growth momentum for China's sustained economic development.
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