Photographer: Qilai Shen / Bloomberg
Photographer: Qilai Shen / Bloomberg
The Chinese Communist Party’s new promise to set the “demand side” of the economy has led management’s expectations to implement more egalitarian policies to boost consumer spending.
The main leaders of the party used the phrase “demand-side reform” for the first time this month, in a deviation from its focus on “supply-side” changes that involve modernizing industry and reducing capacity in inflated sectors.
Although China is the only major economy to grow this year due to its effective control over the pandemic, the new slogan signals that the ruling party is concerned about the uneven recovery in household spending from investment in real estate and infrastructure. Beijing did not elaborate on the phrase, but officials dropped the clues and economists rushed to make suggestions.
The share of workers is stagnating
Attempts to rebalance the economy have not yet borne fruit
Source: Sources: University of Groningen, University of California, Davis, through the Federal Reserve Bank of St. Louis FRED database
Redistribution of income
The term “demand side” is used to refer to investment, consumer spending and any trade surplus. Beijing has called for investment to replace exports as a driver of economic growth during the 2008 financial crisis, when overseas orders slowed and have since struggled to “rebalance” demand for consumer spending.
Economists blame this imbalance on several factors, including wage inequality, which means that incomes accrue to richer households, which are less likely to spend, and the relatively high share of gross domestic product paid as a profit for capital owners, rather than as a wage for workers.
Senior officials, including President Xi Jinping and Vice Premier Liu He, have drawn attention to these issues this year. One In a speech published in August, Xi spoke of the low share of wages in GDP and the “remarkable problems in income distribution” and quoted “Capital in the 21st Century” by French economist Thomas Piketty, pointing to the harmful effects of inequality. Liu has called for improved mechanisms for salary increases.
What Bloomberg Economics says …
“In the short term, the goal is likely to increase domestic demand with public consumption and investment. Longer-term policies will aim to stimulate a structural shift in household consumption towards higher value-added products and services. “
– David Qu, economist
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After an annual economic planning meeting this month, the party promised to “optimize the revenue structure and expand the middle-income group.” Shanghai government includes ‘fair’ revenue distribution the next five-year plan, including “regulating excessively high revenues.”
This will require more government intervention through taxes, say some government-affiliated economists. “When a country has a higher level of revenue, the government will intensify its 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 for the richest, granting income tax credits to those with lower incomes, imposing wealth taxes such as property, and charging commissions on capital gains for financial transactions, most being tax-exempt.
“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 the University of Finance and Economics in Southwest China.
Social assistance
Beijing has promised to reduce large differences in the quality and coverage of such public services health and education between different regions. Transferring government spending to such services could encourage households to save less on their income and spend more on goods and services.
“China’s social security spending is about 10% of GDP, which is much lower than 19% in Europe. In the future, there will be a tendency to invest more in the social security system, and the structure of tax expenditures will be adjusted “, wrote the analysts from the securities brokerage Guotai Junnan in a report on the demand reform.
Reform of the resident registration system can also increase access to social assistance. In April, the government said all cities with populations of less than 3 million should abolish rules that limit access to government services only to people officially registered to live in the city. Similar changes could reduce the costs of social services for millions.
obstacles
With Beijing this year saying it will be based on a “dual-circulation strategy “in which economic growth will become increasingly dependent on domestic demand rather than exports, economists expect the government to maintain high levels of investment spending as it moves away from transport infrastructure. and housing to technology and environment projects.
However, any change in focus will likely be gradual.
Beijing has struggled to move forward with a property tax it has planned for more than a decade due resistance from the rich and fears about falling asset prices. And the recent Communist Party meeting said supply-side reforms would continue to be the “main line” of politics.
“China’s decision-makers are talking about rising consumption and demand-driven growth for decades,” he said. Terry Sicular, China-focused economist at Western University in Canada. “But not all the talk about it made that happen.”