Setting aside the geopolitical challenges of a Trump presidency, Beijing faces a difficult economic environment.
While official data proclaim a 5 percent growth rate, almost no one, including ardent supporters, believes the veracity of those numbers. Many analysts advocate for a transition toward balanced growth by enhancing consumption, as current investments heavily depend on state funding to promote growth.
Can the Chinese Communist Party (CCP) apparatchiks boost Chinese consumption?
The CCP knows the challenges facing the economy. Although delayed in its response, Beijing appears to recognize or at least acknowledge that end consumption should increase if for no other reason than to offset declines in industry.
To that end, the CCP’s State Council and the Central Committee released a paper titled “Action Plan to Revitalize Consumption,” designed to hopefully set China on a new course to rebalance the economy. However, despite the great fanfare, it seems unlikely to alter the path of the Chinese economy in any material way. Heavy on bureaucratic initiatives, the plan lacks any fundamental understanding of the actual problem.
On the face of it, the plan contains many items designed to boost consumption. For instance, some proposed initiatives are raising the minimum wage, reducing wage delays, boosting the stock market, providing agricultural subsidies for farmers, increasing pensions, funding child care, offering incentives for appliance trade-ins, and funding senior housing. In many ways, these are helpful, but the fundamental problem is that this plan fails to acknowledge and address the root cause of the imbalance.
Arguably, the main driver of Chinese household savings is the lack of a social safety net from health insurance, unemployment protection, and social security for the elderly. This preemptive savings, as economists call it, motivates an enormous amount of the household savings. The good news is that this plan takes steps to address some of those issues.
However, more fundamentally, the plan fails to address the root causes of the lack of consumption and arguably exacerbates the current economic problems.
For instance, the Chinese consumer—and really all sectors of China—are highly indebted. Although many cite the middling consumer debt-to-GDP to argue that the consumer is not indebted, given the low level of household income in China relative to GDP, the Chinese debt-to-household income ratio is one of the highest in the world, even higher than that of the United States. Highly indebted consumers do not go on spending sprees.
While the plan does at least acknowledge problems such as low pensions, this document fails to address the problem. For instance, in the rural areas of China, retirees receive less than 200 yuan (about $30) a month. Health insurance is designed to cover only minimal basics, and unemployment benefits remain hard to get for many, including anyone working outside his or her home province, lacking a local resident card or hukou. Making face-saving boosts to old age pensions will not address the problem.
However, the primary problem of the plan stems from its further increase in centralizing state control. The Chinese economy remains wildly unbalanced because of state control over industry and spending, so subsidies are needed to keep many sectors afloat. This plan continues to increase the amount of subsidies required from the state for preferred sectors. Farmers, couples with children, real estate for urban village renovation, and others will all receive subsidies. Other programs will receive state assistance even though there is little reason to believe they actually need it, such as the ice and snow tourism plan or the drone consumption plan.
If the Chinese economy is to rebalance, the consumer sector must grow faster than the corporate or public sector, but this merely takes from the state to give to the consumer, implying the public sector will grow at a similar rate to the consumer sector. These programs fail to address the fundamental imbalance of the economy and really just entrench the problems further.
These programs may boost consumption in the targeted sectors, but they are unlikely to boost consumption in the aggregate and are irrelevant to the Chinese economy. Authorities are working to address a problem that can be solved only by reducing the CCP’s role in the economy, but they keep proposing ways to increase its role.
You cannot solve the symptoms of a communist economy without addressing the communist elephant in the room.
