More Active Fiscal Policy Should Target Consumption Boost: Ex-Deputy Director of CPPCC Economic Committee Suggested
As Investment Returns Diminish, Next Stage Fiscal Policy Should Focus on Direct Transfer Payments to Low-income Groups and Relax High-end Consumption Restrictions
For today’s episode, I bring the speech by Yang Weimin at the China Wealth Management 50 Forum. During the speech, Yang points out that China's economy faces insufficient demand, primarily due to weak household consumption rather than inadequate investment or government spending. Insufficient household consumption is not only a prominent issue but has also been a weakness on the demand side of China's development over the past two decades. The strategy for expanding domestic demand should shift from expanding investment to expanding consumption. Vigorously stimulating consumption is crucial for sustained economic improvement next year. He proposes three recommendations:
More active fiscal policy should be primarily directed toward expanding consumption;
Substantially increase transfer payments to low-income groups and accelerate the urbanization of agricultural migrants;
Support the development of consumption-oriented industries and expand the supply and consumption of mid-to-high-end goods and services. High-end consumption should not be viewed as undesirable, and restrictions on high-end consumption should be relaxed.
Yang was the former Secretary General of the National Development and Reform Commission (NDRC)-China's top economic planning agency responsible for macroeconomic management and strategic development. He was also the Deputy Director of the Office of the Central Financial and Economic Affairs Commission, the Party's highest-level body for coordinating and supervising economic and financial policies. He served as the Deputy Director of the Economic Committee of the 13th Chinese People's Political Consultative Conference (CPPCC). Throughout his career, he has played a key role in formulating various industrial policies, particularly in the automotive and hydropower sectors.
Below is the transcript of his speech:
Link: https://mp.weixin.qq.com/s/dGb6evoSUwS0vpnj0Crwtg
The Central Economic Work Conference has highlighted several ongoing challenges facing China's economy: weak domestic demand, operational difficulties for some enterprises, pressure on employment and income growth, and numerous potential risks. But what exactly constitutes this weakness in domestic demand?
Looking at investment figures from January to November, national fixed asset investment grew by 3.3%, infrastructure by 4.2%, and manufacturing by 9.3%, while real estate investment declined by 10.4%. These modest investment rates reflect both cyclical factors and a longer-term trend. China's investment growth has fallen from 20% in the first decade of this century to 10% during 2015-2020. From 2020 through November this year, total investment, real estate, and private investment have all remained below 5%. During this period, infrastructure and manufacturing investment occasionally exceeded 5% but stayed below 10% in certain years.
This trending change in investment patterns suggests that while investment might be stimulated in the short term, sustaining it in the long term will be challenging. Looking at the investment rate (fixed capital investment as a percentage of GDP), it peaked at 44% in 2012, with 2009-2014 being the plateau period. While it has decreased to 41.4% in 2023, this is still six percentage points higher than the 35% rate in 2002. Having 40% of total demand driven by investment is already quite high.
While expanding investment is necessary now, increasing its share of total demand - meaning investment growing faster than total demand - faces physical constraints. This year's total investment continues to be dragged down by real estate. Real estate investment depends on property sales - when housing isn't selling and housing consumption is weak, developers won't invest. While future opportunities exist in real estate investment, they're mainly structural and unlikely to return to previous high growth rates of 10-20%.
China's infrastructure network is largely complete, narrowing investment opportunities. While some areas still need strengthening, these are mainly public welfare projects with low returns requiring larger debt support. In recent years, manufacturing investment growth has been strongly correlated with exports - when exports perform well, manufacturing investment follows, as seen in 2021, 2022, and this year.
Therefore, while investment opportunities exist in China, they won't drive growth as immediately as in 1998 or 2008. Previously, projects lacked funding; now, funding lacks projects. Overall, from a long-term perspective, insufficient domestic demand should not be primarily attributed to insufficient investment. The Conference's emphasis on improving investment efficiency is particularly meaningful in this context.
Final consumption consists of household and government consumption, with government consumption typically accounting for around 30% of the total. Since 2010, the government consumption rate (government consumption as a percentage of GDP) has generally increased, reaching a peak of 17% in 2020 before falling to 16.5% in 2023 - still nearly 2 percentage points higher than 2007's 14.6%. Government consumption, primarily directed toward public administration and services, has grown rapidly due to both enhanced public services and rapid expansion of administrative personnel. Over the past decade, the public administration sector saw the largest employment growth among all industries. Since government consumption is budget-constrained - spending what's available - it's difficult to judge whether it's sufficient or insufficient. Therefore, weak domestic demand cannot be attributed to insufficient government consumption.
If it's neither insufficient investment nor government consumption, then it must be weak household consumption. In April this year, total retail sales growth slowed significantly to 3.6 trillion yuan, lower than most months in the previous year, remaining below 4 trillion yuan for several subsequent months. October saw an increase to 4.5 trillion yuan, supported by trade-in policies, before falling back to 4.37 trillion yuan in November.
Per capita consumer spending grew by 14.4% year-on-year in the first quarter, mainly due to base effects, before declining to 5% and 3.5% in the second and third quarters. While trade-in policies boosted goods consumption, their impact on service consumption was limited.
Housing represents a crucial component of household consumption, with commercial housing sales reflecting residential consumption. From January to October this year, commercial housing sales totaled 650 million square meters, down 17.7% year-on-year, and will likely fall short of last year's 950 million square meters, returning to 2010 levels.
Looking at final consumption's contribution to economic growth (including government consumption), the second and third quarters showed significant declines, reaching some of the lowest levels in recent years outside of the pandemic period. In the third quarter, final consumption's contribution to economic growth was only 29.3%, less than half of normal years. These three indicators confirm that weak domestic demand indeed stems from insufficient household consumption.
This weakness in household consumption isn't just a current issue - it's been a structural weakness on the demand side of China's development for the past two decades. The household consumption rate (household consumption as a percentage of GDP) has fallen from 45.7% in 2001 to 39% in 2023. While this is an improvement from the 2010 low of 35%, it's still 6.7 percentage points below 2001 levels.
The Central Economic Work Conference's prioritization of expanding demand among its nine major tasks is both timely and necessary. Historically, development policies have focused heavily on expanding supply, with insufficient attention to demand, particularly household consumption. Research into demand generation mechanisms, endogenous drivers, and effective policies has been inadequate, with economic policies primarily oriented toward expanding investment and supply. While we're well-versed in expanding investment, we're less adept at boosting consumption.
In 1998 and 2008, our strategy to expand domestic demand was primarily addressing insufficient external demand. While those strategies included consumption-promoting policies, the implementation ultimately favored investment over consumption. Today, we face insufficient domestic demand driven by weak household consumption rather than weak external demand. Therefore, this time our strategy for expanding domestic demand must shift from investment expansion to consumption growth.
If the economy grows by 5% in 2025, GDP will increase by 6.6 trillion yuan, requiring an equivalent increase in total demand. Where will this additional demand come from? Based on this year's first three quarters' contribution ratios from consumption, investment, and net exports, next year would need final consumption to increase by 3.3 trillion yuan, investment by 1.7 trillion yuan, and net exports by 1.6 trillion yuan. With net exports already contributing 23.8% to growth in the first three quarters this year, achieving another 1.6 trillion yuan increase on this high base seems unprecedented and extremely challenging. This suggests that next year's 5% growth target cannot simply replicate this year's growth pattern.
If net exports cannot achieve the 1.6 trillion yuan increase, the demand gap must be filled by either increased investment or consumption. Which path should we prioritize? The Central Economic Work Conference emphasized boosting consumption while improving investment efficiency, suggesting a preference for consumption-led growth. The Conference dedicated significant attention to policies for expanding household consumption. Here are three key recommendations:
More Aggressive Fiscal Policy Supporting Consumption
Household consumption increased by 1.26 trillion yuan in the first three quarters, likely reaching 1.8 trillion for the full year. Even if investment completely offsets the net export shortfall next year, household consumption still needs to grow by 2.3 trillion yuan. Current consumption policies alone won't achieve this target. The Conference called for optimizing fiscal spending structures to benefit people's livelihoods, promote consumption, and enhance long-term growth potential. Therefore, we should reduce the proportion of incremental fiscal spending on investment while increasing support for consumption.Substantially Increase Income Transfers to Low-Income Groups
A major factor in weak consumption is the large low-income population with limited spending power. Assuming a 90% consumption rate among low-income groups, their average annual consumption is just 8,293 yuan - merely 700 yuan monthly. While the Conference proposed targeted measures, implementation needs to accelerate and favor low-income groups. Additionally, reforms reaffirmed at the Third Plenum should be expedited, including urbanization of rural migrants, rural collective construction land marketization, and expanding options for rural housing utilization. These previously approved reforms should move directly to implementation without further pilot programs.Support Consumer-Oriented Industries
Demand policies focusing on household consumption need to match industrial policies. The industrial development strategy should be reframed to upgrade traditional industries, develop emerging industries, nurture future industries, and support consumer-oriented industries. Separately identifying consumer-oriented industries would help guide market forces and local governments to prioritize their development. The Conference emphasized expanding service consumption, with supply being a key factor. Since most services are consumed at the point of delivery, we should ease market entry barriers and consider implementing a negative list approach for service industries, allowing market forces to drive innovation outside regulated areas. Additionally, we should support the expansion of high-end goods and services, moving away from viewing premium consumption negatively and relaxing some restrictions on high-end consumption.