The Dilemma of China's Consumerism

The Dilemma of China's Consumerism

The Chinese government recently ended its "zero COVID" policy and the economy bounced back quickly in the past three months. This policy caused many problems for Chinese businesses and the supply chain, resulting in very slow growth for nearly three years. When the policy was suddenly lifted, chaos ensued, and a large number of people contracted COVID-19. However, the pandemic has largely ended now, and with that barrier removed, the government set a growth target of five percent for 2023.

Although many were optimistic about China's quick recovery after the pandemic, it might not be enough to save the global economy from an upcoming recession. The Chinese government's target of a five percent growth rate might seem low, but it reveals the many vulnerabilities they're facing. This includes the local government's lack of income and the struggling property industry. One of the biggest concerns is their export sector, which is still doing well despite the pandemic. However, it might backfire during a global recession as global demand for Chinese goods decreases.

The main issue is not the demand from other countries, but rather the lack of demand within China itself. The government isn't doing enough to boost the economy, and local governments are cutting back spending. With the export sector facing challenges, the only way forward is to focus on increasing domestic consumption. However, this is easier said than done since Chinese households tend to save a lot of their income, putting aside around one-third of their earnings. The government has been trying to shift the economy away from investments and towards consumption for the last fifteen years, but it's been a struggle. Whenever the Chinese economy hits a rough patch, the government usually turns to investments and exports as a quick fix. This has resulted in vast amounts of money being invested in new infrastructure, such as housing, trains, highways, and airports, all of which help to support Chinese manufacturing and exports.

China is facing some other issues that could cause a problem for their economy. One of these issues is a decline in their population. China's population growth is slowing down faster than expected and it even went down for the first time in 2022. Seven years ago, the Chinese government stopped the one-child policy in the hope of increasing the birthrate, but sadly, it didn't work as there wasn't any baby boom. This is a tough situation to fix, and it seems like the Chinese government doesn't know what to do. It's not going to be easy to change direction, but there are some important things that Beijing could do to support a "pro-consumption" agenda. The success of these solutions will not only affect China's growth, but it will also have a significant impact on the global economy.

Spend Less and Save More.

Boosting consumption is a difficult task for any government, especially in a country as large as China. It would be too expensive to continuously subsidize the consumption of 1.4 billion people, 600 million of whom live on roughly $5 per day. Increasing consumption sustainably requires two things: optimizing the economy for growth and raising household income and confidence. However, Chinese President Xi Jinping seems less interested in optimizing the economy for growth and more focused on security and resilience. In the 2021 Five-Year Plan, Xi made a significant decision to abandon China's long-standing policy of setting a hard growth target, which had been the framework for the Chinese political economy for decades. This decision signifies that the growth target of 5 percent for 2023 is merely guidance, not a binding order.

The new Chinese leadership is changing their approach to the economy. Instead of just trying to grow as fast as possible, they want different provinces to work together to develop new technologies and make sure supply chains are secure. This will help them use their resources more efficiently and save money. They want to do this because they face competition from the United States in technology and they want to make more progress at home. China is already really good at manufacturing things, but to keep up with the most advanced technology, they need to spend a lot of money, and it's not always clear if it will pay off. Even though they have given lots of money to the semiconductor industry, they still lag behind competitors by 10 years. The Chinese leadership hopes that by focusing on industrial policy, they can improve in this area. They care more about making better chips than just growing their economy.

If the main goal is no longer simply economic expansion, then promoting consumption can still prioritize building consumer trust and increasing household income. The leaders of China recognize that the country's people lack hope for their financial prospects. During the pandemic, the household savings rate soared to its highest level since 2014, reaching a staggering 38 percent of disposable income. Because of the current risks facing growth factors such as deleveraging, stagnant productivity, and a struggling property market, Chinese households will continue to prioritize saving rather than spending. With youth unemployment currently sitting at 17 percent, it's clear that simply making public statements is not enough to confer confidence on them. To truly build trust and assurance, concrete measures must be taken.

In order to boost spending, the Chinese government could provide households with consumption vouchers. These are coupons that are issued by the government and can be used to buy goods or services. A test run was carried out in 2020 and it was a success, with every one yuan spent resulting in three yuan of consumption. Additionally, if the government lifts its recent regulations on education services and Big Tech, this could create job opportunities for graduates. However, it is more important for China's leaders to show that they prioritize consumption in the long term. One way to do this would be for Beijing to declare its goal of increasing household income's share of GDP to at least 70% by 2030 (in the US, this ratio is already at 80%). This would require support from the Chinese government at all levels, making it a concrete target for achieving a "moderately prosperous Chinese society."

To achieve a pro-consumption agenda, the relationship between the government and private sector in China must be reset. The private sector contributes to 60% of GDP and 80% of jobs, making it crucial for any such agenda. The government can show its support for the private sector by avoiding higher taxes on private businesses and entrepreneurs. Instead, the government can redistribute from the state to households to raise household income. As the Chinese government is the ultimate owner of these firms, it can use their profits to funds other priorities such as financing public services for low-income households or supporting the pension and health-care costs of households. In rural areas, farmers must be given the power to sell their land at a fair market price to the government. This would help them start their own businesses or move to cities where they can find better-paying jobs. Such reforms will instill greater confidence in households' future prospects and assure the private sector that the "common prosperity" agenda does not intend to suppress its growth and dynamism.

If the Chinese government focuses on promoting consumption, it could change the way the world sees China. Instead of focusing just on growing GDP, China needs to find ways to address the doubts and concerns of global investors. Increasing consumption would be a positive step in this direction as it would help reassure investors and boost global confidence in the Chinese economy. A push towards consumerism also helps China in another way: it could become the world's top economy with a strong middle class by 2035. And this shift would have additional benefits. It would lead to less investment in carbon-emitting industries and ultimately help China transition towards a net-zero economy by 2060.

If Beijing focuses on boosting domestic consumption, it could stabilize the economic relationship between the US and China. By enhancing household income, the Chinese government could balance out the world's largest saver and the world's largest consumer. If China increases imports and consumption of foreign-made goods, it could diminish long-standing conflicts with the US involving currency, trade, and jobs. Currently, China accuses the US of starting a trade war, while the US blames China for funding government subsidies and manipulating currency to harm US industries and dump products in US markets. With a focus on domestic consumption, Beijing may mitigate each side's tendency to blame the other for their economic challenges.

It is not certain that following these steps will lead to success. Even if Beijing agrees to focus on promoting consumption, they may struggle due to political constraints within the country. For example, policies that benefit Chinese households will likely harm state firms, which have a lot of power and support from the CCP. These state-owned enterprises may not be willing to distribute their profits to households, making it difficult for the government to financially support the people. This could result in Beijing having to choose between cutting social security benefits and dealing with unfunded mandates. Both options could be unpopular and lead to social unrest, like the recent protests by retirees. Additionally, a strong private sector is necessary to support domestic consumption, but this goes against Beijing's recent trend of centralizing companies. Allowing more power to the private sector could challenge the Xi administration's desire for greater control.

China has been struggling to increase consumer spending just like how the US has struggled to reform healthcare. Everyone agrees that it needs to happen, but progress has been slow. The main difference is that China's GDP per person is still much lower than that of the US, so they need to focus on increasing consumption to catch up. They have two options: focus on increasing consumption or risk not becoming the world's largest economy in the next decade.

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