Photographer: Qilai Shen / Bloomberg
Photographer: Qilai Shen / Bloomberg
The Chinese Communist Party’s new commitment to fixing the “demand side” of the economy has motivated expectations that leadership will implement more egalitarian policies to stimulate consumer spending.
The top leaders of the party used the phrase “demand-side reform” for the first time this month, moving away from its past focus on “supply-side” changes that involve upgrading the industry and reducing capacity in inflated sectors.
While China is the only major economy to grow this year due to its effective control of the pandemic, the new slogan indicates that the ruling party is concerned about the uneven recovery in which household spending has fallen behind investment in real estate and infrastructure. Beijing has not detailed what the phrase means, but officials have set aside suggestions and economists have been quick to offer suggestions.
The share of workers stagnates
Attempts to rebalance the economy have not yet borne fruit
Source: Sources: University of Groningen, University of California, Davis, through the St. Louis Federal Reserve Bank’s FRED database
Income redistribution
The term “demand side” is used to refer to investment, consumer spending, and any trade surplus. Beijing engaged in investment to replace exports as a driver of economic growth during the 2008 financial crisis, when orders abroad slowed down and it has since struggled to “rebalance” demand for consumer spending.
Economists blame this imbalance on several factors, including wage inequality which means income accumulates in richer households who are less likely to spend and the relatively high proportion of gross domestic product paid as profits to more capital owners. than as wages to workers.
Top officials, including President Xi Jinping and Vice Premier Liu He, have drawn attention to these issues this year. In a In a speech published in August, Xi spoke of the low proportion of wages in GDP and “outstanding problems in income distribution” and cited the “Capital in the 21st Century” by French economist Thomas Piketty as a sample of the harmful effects of inequality. Liu has called for improved mechanisms for increase wages.
What Bloomberg Economics says …
“In the short term, the goal is likely to increase domestic demand with public consumption and investment. Long-term policies will aim to drive a structural shift in household consumption towards more value-added products and services. “
– David Qu, economist
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After an annual financial planning meeting this month, the party he pledged to “optimize the revenue structure and expand the middle-income group.” The Shanghai city government included a “fair” revenue distribution in its the next five-year plan, which includes “regulating excessively high incomes.”
This will require more government intervention through taxes, according to some government-affiliated economists. “When a country has a higher level of revenue, the government will intensify efforts to redistribute revenue with taxes and transfer payments,” according to a speech in August by Cai Fang, vice president of the Chinese Academy of Social Sciences, an influential government think tank.
Specific measures could include raising income taxes on the richest, providing income tax credits to people on lower incomes, taxing wealth taxes such as property and collection of capital gains from financial transactions, most of which are tax-free.
“I think the income tax is already quite progressive. The key is capital gains tax, ”said Gan Li, director of the China Household Finance Research and Research Center at Southwest China University of Finance and Economics.
Social welfare
Beijing has promised to reduce the big gaps in quality and coverage of public services such as health care and education between different regions. Moving government spending to these services could encourage households to save less on their income and spend more on goods and services.
“China’s social security spending accounts for about 10% of GDP, which is well below 19% in Europe. In the future, it will be the tendency to invest more in the social security system and the structure of fiscal spending will be adapted, ”wrote securities brokerage analysts Guotai Junnan in a report on demand reform.
Reforming the resident registration system can also increase access to social welfare. In April, the government said all cities with a population of less than 3 million should abolish rules that limited access to government services only to people officially registered to live in the city. Similar changes could reduce millions in social service spending.
Obstacles
With Beijing this year saying it would depend on a “dual-circulation strategy ”, in which economic growth will increasingly depend on domestic demand, rather than exports, economists expect the government to maintain high levels of investment spending, while moving away from infrastructure. transport and housing towards technological and environmental projects.
However, any change in emphasis is likely to be gradual.
Beijing has struggled to move forward with a property tax it has planned for more than a decade resistance of the rich and fears about falling asset prices. And the recent Communist Party meeting stated that supply reforms would continue to be the “main line” of politics.
“China’s policymakers have been talking about rising consumption and demand-driven growth for decades,” he said. Terry Sicular, China-centered economist at Western University in Canada. “But the whole discussion about that hasn’t come true.”