The recently concluded “Two Sessions” saw substantial attention allocated towards the boosting of domestic consumption as a primary engine for China’s next stage of economic development.1 As emphasized by President Xi Jinping in a speech delivered in December – reprinted in the mid-February issue of Qiushi, the leading official theoretical journal of the Communist Party of China2 – there is a clear and unmistakable need for China to boost domestic demand through “prioritizing the recovery and expansion of consumption,” as well as “effectively driving investment of the whole society.” The shift towards consumption-led growth is not only a prescient and valuable move, but also indicative of China’s undergoing a fundamental transition towards an upper-middle-income country with a self-replenishing economic structure.
The Unmistakable Impetus for Boosting Consumption
China has long sought to undertake a comprehensive shift towards domestic consumption. This has been for several reasons. First, China’s export-led and investment-driven growth model, as noted by famed economists such as old China hand Stephen Roach, financial economist James Fok, and academic Michael Pettis, is increasingly running out of steam.3 Saturation of existing investments, a dearth of destinations for transformatively lucrative investments, as well as the exogenous constraints imposed by international credit climate (e.g. the Fed is tightening its rates, and the world is shifting towards a seemingly anti-inflation consensus on macroeconomic policies that sacrifices growth via investment), have rendered it the case that investment is no longer the primary bread-winning strategy for countries, not even in a country as expansive and sizeable as China. Most fundamentally, as flagged repeatedly by leading regulators and bureaucrats in the country, an over-reliance upon capital-oriented economic growth generates an unhealthy volume of household savings – China’s household savings rate, hovering between 35% to 40% over these past few years,4 is much higher than that of many of its international counterparts. After exhausting the conventional runway for capital-induced growth, the economy as a whole must look elsewhere for sources of growth.
Second, as China seeks to cultivate greater strategic autonomy as a global power, it is imperative that it possesses the necessary economic resilience, free of dependence upon external and international actors that determine the shape, direction, and nature of the country’s supply chains. Whilst the sizeable economy has historically served as the manufacturing hub and production nexus for goods ranging from advanced electronic appliances and gadgets to processed and refined energy products, the increasingly stiff competition from rival economies, as well as geopolitical fragmentation induced upon global supply chains, has rendered it the case that China must look elsewhere for real economic security. Domestic consumption allows for the cultivation of an enduring and sustainable “inner circulation,”5 thus enabling the central government to be at the helm of a homegrown, domestic virtuous cycle of consumers, producers, and intermediaries engaged in digital platform and services in connecting the former two groups. This virtuous cycle in turn can promulgate further developments in innovation, and facilitate the dual-track expansion of China’s high-end manufacturing and professional service sectors. Uniquely, as the 400-million-strong middle class6 continually increases in population and consumption power, the industrial and sectoral diversification highlighted here is all the more likely to pay off in supporting the country’s developing a sustainable macroeconomic ecosystem of its own. It is then that the country would be less susceptible to external attempts to shape or alter domestic politics, governance, and approaches to policymaking through the leveraging of trade as a tool of influence.
Finally, consumption matters insofar as it allows China to reduce its net trade surplus with the rest of the world. As it stands, Chinese consumers often find themselves inhibited by a relatively underappreciated RMB, which hinders their purchasing power vis-à-vis imported and international goods. A comprehensive boosting of domestic consumption would enable China to lift some of these ceilings and caps on domestic purchasing power, thereby creating a sizeable segment of the population that wields an ever-greater influence over brands, businesses, and providers of goods and services abroad. What is oft overlooked as a core explanation and pillar of American dollar’s strength and projection over the world, is how ubiquitous the USD is used as a common currency of circulation by tourists and investors alike from different countries. As China seeks to digitalize RMB and champion a world of financial multi-polarization, a critical prerequisite for that is that more tourists, vendors, and consumers around the world must use the (digital, off-shore) RMB. This is where consumption strengthening yields once again material benefits.
Towards a Renewed Framework for Boosting Consumption
Having established the above, how are we to boost domestic consumption? A useful approach would be to decompose consumption into the following components: i) real wages, ii) credit availability, and iii) propensity to consume. The first two factors (i and ii) bear directly on the absolute size of real disposable income; factor iii, in turn, determines how much of the income in fact goes towards consumption. We should consider each of these factors in turn.
On the first, there are relatively straightforward fixes that China can adopt to lift both the aggregate sizes of real wages, as well as redress the uneven distribution of real wages throughout the country. As one of the most competitive and the largest manufacturing hubs in the world, China has long benefited of highly efficient, cheap, and thus cost-effective manual labor. Yet with wage levels appreciating considerably under the substantial contributions of the opening-up and reform era, and as foreign and domestic factories begin to relocate to countries with even cheaper labor prices (e.g. Vietnam and Indonesia in Southeast Asia, India, and Bangladesh in the Subcontinent, to name but a few), China has come to recognize that a mere wage-centered pitch alone is no longer sufficient in retaining the country’s competitiveness at large. Instead, the economy must transition towards dominating and owning mid-income to high-income manufacturing industries, such as bio-technology, digital technology, and medical/pharma technology, where the intensity and quality of human capital matter more than the raw strength and quantity of such labor. Through new industries ranging from developing renewables to organic life sciences, as well as the fostering of more favorable conditions for private enterprises in e-commerce, renewable energy vehicles, and high-end luxury and retail goods, the Chinese economy can and will come to deliver more significant appreciation in real wages of its workers.
Rectifying the uneven distribution of these wages is the key to ensuring that the lower-middle classes can be empowered eventually with the spending capabilities and budgets of the middle class in China today. Hence the “Common Prosperity” and “Rural Rejuvenation”7 initiatives advanced by the incumbent administration not only serve a vital role in facilitating China’s modernization, but also go hand-in-hand in boosting consumption in remote areas where infrastructure and credit systems have much room for development. An enlarged consumer class in the suburbs and rural countryside of China not only tackles head-on concerns of socioeconomic and rural-urban disparities – by equalizing life chances and exposure to high-quality goods and services between cities and countryside, it also expands the total size of real wages accrued to individual households in the economy, which serves as a precursor to more household spending and injection into the circular flow. In short, taking on i) is of paramount importance.
Now, some voices have suggested that China must also explore credit expansion.8 These voices suggest that in lieu of merely relying upon cuts to the reserve requirement ratio,9 China should pursue more aggressive and direct policies designed to stimulate consumption. These measures could feature reduction to VAT, lifting of restrictive criteria designed to prevent (excess) borrowing, as well as the fostering of a general climate and culture in which consumption and borrowing are normalized – as opposed to stigmatized. If China is to become an economic great power, it must learn to spend like one; or so, the argument goes.
Whilst I am sympathetic somewhat to these views, and accept fully that there remains much room for China to constructively expand the availability of credit, it is vital that we differentiate between two core concepts: stimulus-boosted consumption, and purely credit-driven consumption. The slashing of reserve ratio requirements goes a long way in facilitating the former, through propping up small and medium businesses, supporting an extension to the moratorium on debt repayment for companies in distress, and ensuring that inter-bank loans can be granted to tie banks over the edge (avoiding the disastrous fate of the Silicon Valley Bank,10 for one, would be ideal). On the other hand, consumption that is built upon the basis of encouraging borrowing, must be handled with care. Household debt levels remain at a highly manageable level within China, and this is a virtue, not a weakness, of the system. The culturally engrained ethos of not spending beyond one’s means has enabled Chinese consumers to be much less vulnerable to problems of overdraft, indebtedness, and financial unsustainability, as compared with their American counterparts. Hence any solution targeting ii) should be calibrated and designed with much prudence and care.
Of course, the elephant looms in the room. Chinese consumers have a “savings glut” problem – that is, they save substantially more than their counterparts in countries at comparable levels of average GDP per capita. Fixing consumption in the country requires taking on iii), i.e., encouraging households to save less, and spend more (without incurring excess debt). This is best accomplished through addressing the root causes of the savings glut in China – generalized anxieties and concerns over livelihood questions. Some would argue that the most pressing livelihood problems constitute the surging housing prices and radical socioeconomic inequalities seen in cities, yet such accounts do not seem to do justice to instances where consumption growth has occurred despite widening inequalities (e.g. in America and South Korea). Others would posit that it is the spike in unemployment induced by the past few years of the pandemic and pandemic measures – yet this does not explain the fact that China has long had unusually high savings rates, since the end of the 1990s.
The real answer, I suggest, lies with the challenges confronting private entrepreneurship and businesses in the status quo, as well as the lack of a robust consumption culture. Individuals are more likely to spend if they perceive there to be a moderately viable, clear, and abundant range of economic pathways that they can pursue in advancing their own self-interests. From private entrepreneurship to start-up and innovation, from high-end professional services to retail SMEs, the decades since reform and opening-up had seen China catapulted into unprecedented economic heights through tapping into the creativity of the private economy and sector. At times like these, it is vital that we rekindle the animal spirits of the private sector, and offer the space and room for private entrepreneurship to once again grow. As Premier Li Qiang aptly declared, “Our private entrepreneurs will continue to write their exciting entrepreneurship stories.”11 This is a most reasonable policy prescription given the trying times in which we find ourselves.
Furthermore, it is vital that consumption be normalized and accepted as a part-and-parcel component of standard economic activities. The thought that we cannot consume, on grounds that it is a signal of flagrant profligacy, should not be conflated with an all-round and total inhibition of the desire to spend. Healthy and balanced consumption of goods – including luxury goods – is critical in developing a multi-faceted culture where individuals are at ease with leading plural, flourishing lives of recreation and leisure. Consumption underpins and drives the modern lifestyle economy, which in turn nourishes the civilizational and spiritual quality of society at large. As China transitions into a higher-income economy, it is vital that consumption be treated as a constructive and serious part of the social fabric.
Looking to the Future
As China emerges from the shadows of the pandemic of the past few years, it is high time for the economy to seize upon the opportunities afforded to it by the recovery, in undertaking more systematic and sustainable reforms – to gear the economy up for the challenges that lie ahead. Boosting domestic consumption will indubitably be an arduous and at times frustrating process. Yet uniquely, the Chinese government certainly possesses the staying power and political resolve to see through decisions that may well be temporarily unpopular or difficult to execute. It is with this in mind that we must look towards a future where consumption comes to serve as a core pillar of the renewed Chinese economic miracle.