State Council Meeting Signals Major Shift in Chinese Economic Policy on Consumption

Premier Li Qiang chaired the State Council meeting, highlighting domestic consumption, rare rhetoric shift on economic policy

For today’s episode, I bring you a readout from last Friday’s meeting. (Sorry for being lazy during the weekend) Premier Li Qiang chaired the fifth plenary meeting of the State Council on August 16.

During the meeting, Li talks about four issues, these are

1. Comprehensively Deepening Reforms
   The need to deepen reforms comprehensively. Key aspects include:

   1. Focusing on fiscal and tax system reforms, building a unified national market, and promoting new urbanization

   2. Strengthening the integration and coordination of various reform measures

2. Enhancing the Trend of Continuous Economic Recovery and Improvement
   The importance of measures to strengthen economic recovery, including:

   1. Expanding domestic demand, with a focus on boosting consumption

   2. Promoting various types of consumption, including service consumption and bulk consumption

   3. Expanding investment, leveraging the role of government investment, and supporting private investment

   4. Optimizing communication mechanisms between government and businesses to address practical difficulties

   5. Developing new productive forces and advancing digital transformation

3. Expanding High-Level Opening-Up
   Proactively adapt and expand high-level opening-up, specifically:

   1. Developing new foreign trade growth points such as green trade and cross-border e-commerce

   2. Supporting enterprises in exploring diversified markets

   3. Increasing efforts to attract and utilize foreign investment

   4. Improving services for foreign investors

4. Ensuring and Improving People's Livelihoods, Enhancing Government Work's Legal Compliance

   1. Stabilizing employment for key groups

   2. Developing policies to increase urban and rural residents' incomes

   3. Ensuring basic needs at the grassroots level

   4. Promoting green and low-carbon development

   5. Balancing development and security

   6. Improving the rule of law in government work and optimizing law enforcement methods

   7. Fostering innovation and development of various business entities through a favorable business environment

      

In Chinese reports, sequence matters. I’d like to highlight that:

1. The paragraph on consumption has been prioritized at the position just behind the “Structural Reforms“ part, ahead of further opening up to boost exports.

2. Within the consumption part, domestic consumption has also been prioritized ahead of the investment.

李强强调，要咬定目标不放松，下大力气增强经济持续回升向好态势。要更加有力扩大内需，以提振消费为重点，针对性采取措施，畅通经济循环。促消费要重点抓好增长性、带动性强的领域，加快服务消费扩容提质，有效促进大宗消费，根据不同群体需求制定差异化支持政策，充分释放消费潜力。

Li Qiang emphasized the need to firmly adhere to the set goals without slackening, and to make great efforts to strengthen the trend of continuous economic recovery and improvement. He stressed the importance of more forcefully expanding domestic demand, focusing on boosting consumption, and adopting targeted measures to smooth economic circulation. To promote consumption, efforts should concentrate on areas with strong growth potential and driving effects, accelerating the expansion and quality improvement of service consumption, effectively promoting bulk consumption, and formulating differentiated support policies based on the needs of various groups to fully unleash consumption potential.

My interpretation of this development is that bolstering domestic consumption has been elevated to a top priority, and we may soon see more detailed policies emerging from various government departments. The emphasis on “areas with strong growth potential and driving effects” suggests potential targeted interventions.

Specifically, we might anticipate policies such as:

1. Trade-in incentives for electric appliances

2. Subsidies for fuel car owners transitioning to electric vehicles

These areas are particularly noteworthy because both the home appliance manufacturing and electric vehicle industries feature relatively long industrial chains and possess strong multiplier effects on the broader economy.

Another part of this meeting worth paying attention to is the shift in rhetoric regarding economic policy.

Previously, during the World Economic Forum this June, Li said that China is drawing inspiration from traditional Chinese medicine, introducing the concept of '培本固元' (pei ben gu yuan) - strengthening the foundation and nourishing the vital essence. He applied this principle to China's approach of precisely regulating the economy and improving its fundamental structure. He explained that following the pandemic's impact, the economy resembles a person recovering from a serious illness. Drawing further on traditional Chinese medical theory, he explained that this is not the time for potent remedies. Rather, what's needed is precise and gradual regulation to allow the economy's foundation to recover steadily. This metaphor typically implies the implementation of moderate fiscal and monetary policies.

However, what we see in last Friday’s report is

要咬定目标不放松，下大力气增强经济持续回升向好态势。要更加有力扩大内需

firmly adhere to the set goals without slackening, and to make great efforts to strengthen the trend of continuous economic recovery and improvement.

We should focus on two key phrases: '下大力气' (xia da li qi), meaning 'make great efforts,' and '更加有力' (geng jia you li), translating to 'more forcefully.' Both emphasize the commitment to meet annual development goals. The use of these phrases together typically signals a shift towards more expansionary fiscal policies and accommodative monetary measures. It’s my first time seeing such a strong expression regarding the overall economy. Still, we must await specific details from the central bank and finance ministry to fully grasp the implications.

Source:

https://www.gov.cn/yaowen/liebiao/202408/content_6968805.htm(in Chinese)

https://english.www.gov.cn/news/202408/16/content_WS66bf4569c6d0868f4e8e9fdc.html (in English)