China finds itself in a quandary: More concerned with its security and with quick fixes to jump-start its economy, the government is failing to play the long game, say scholars Damien Ma and Houze Song in this solid analysis. The authors argue that robust domestic consumption would allow China to become the world’s biggest economy by 2035, and they also advocate for the continuing involvement of state enterprises, a critical component of any strategy to cut households’ savings and boost their spending. Readers interested in China’s long-term challenges and its place in the global economy will find this an informative report.
- China’s less-than-ambitious growth target reveals susceptibilities unique to its economy.
- Insufficient domestic demand carries important implications for China and the world.
- Leaders need to improve their relationship with the private sector and use state enterprises to facilitate domestic spending.
China’s less than ambitious growth target reveals susceptibilities unique to its economy.
Now freed from government-mandated COVID-19 restrictions, China’s economy is recovering. Yet the government has issued a 2023 growth target of only 5%, a modest goal that speaks to the precarity of its economy: Local governments are cash-strapped, and property developers are hurting. Even exports, barely affected by the coronavirus shutdowns, could become a liability if a global downturn results in less overseas demand for Chinese products.
“Chinese President Xi Jinping, having secured his third term, appears much less interested in organizing the economy for growth than his predecessors did. Instead, he is optimizing it for security and resilience.”
The bigger issue is a lack of robust domestic consumption, China’s last hope for economic growth. The government has struggled for years to pivot from state investment and exports to consumption. Adding to the challenge have been high savings rates – Chinese households stash away about one-third of their income – as well as diminishing population growth, which could augur economic stagnation.
Insufficient domestic demand carries important implications for China and the world.
Households will not shift from high savings to greater spending until China acts more decisively in confronting issues like wan productivity, weak social safety nets and high youth unemployment. In the short term, the Chinese government could issue vouchers for the purchases of goods and services to boost consumption, and ending restrictions on education services and large technology companies would increase job opportunities for new college graduates.
“Targeting income would serve a similar political purpose as the GDP target: It would require the Chinese government at every level to support that goal. Moreover, it would marry a concrete target to the vague notion described by the Chinese Communist Party (CCP) of achieving a ‘moderately prosperous Chinese society’.”
A consumption drive would focus on the long-term objective of raising the ratio of household income to GDP from 62% to 70% by 2030; for context, the rate is currently 80% in America’s consumer-led economy.
Leaders need to improve their relationship with the private sector and use state enterprises to facilitate domestic spending.
For a consumption-driven agenda to work, China should abandon its adversarial relationship with the private sector, no easy task given the outsized role of the state sector as a government policy instrument. Giving state-owned enterprises a part in reallocating resources to spur private sector and consumer spending, rather than increasing taxes on entrepreneurs and private concerns, would be a prudent way to raise domestic consumption. For example, the state sector could redirect profits to underwrite public services for poor households or pay for social insurance and health care obligations.
“Whether it likes it or not, China faces a stark choice. It can either choose a pro-consumption path or risk forfeiting its goal of becoming the world’s largest economy over the next decade.”
Getting consumers to spend more money would promote China’s global image and put financial markets at ease. Strong domestic spending would allow China to become the world’s biggest economy by 2035, with the largest middle class on Earth. It would also calm tensions with the United States on issues of currency manipulation, trade and employment. Climate goals would benefit in the transition away from investing in carbon-intensive industries. Whether this succeeds will depend to a great extent on how much President Xi Jinping is willing to counter his recent command-and-control policies by decentralizing, loosening restrictions on big companies and giving some power to the private sector.
About the Author
Damien Ma is the managing director of MacroPolo, a think tank at the Paulson Institute, where Houze Song is a fellow.