(Bloomberg) – The Chinese Communist Party’s new promise to correct the “demand side” of the economy has raised hopes that leaders will implement more equal policies to boost consumer spending.
Main Party leaders used the phrase “demand-side reform” for the first time this month, moving away from the past focus on “supply-side” changes, which involve modernization of industry and reduction of capacity in swollen sectors.
Although China is the only major economy to experience growth 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 picked up. lag behind investments in real estate and infrastructure. Beijing hasn’t detailed what the phrase means, but officials dropped the clues and economists were quick to offer suggestions.
The term “demand side” is used to refer to investment, consumer spending and any trade surplus. Beijing turned to investment to replace exports as the engine of economic growth during the 2008 financial crisis when overseas orders slowed, and has since struggled to “rebalance” demand towards consumer spending.
Economists attribute this imbalance to several factors, including wage inequality which means income goes to richer households who are less likely to spend, and the relatively high share of gross domestic product paid out as profits to owners of capital. rather than wages to workers.
Senior officials, including President Xi Jinping and Vice Premier Liu He, have drawn attention to the issues this year. In a speech published in August, Xi referred to the low share of wages in GDP and “unresolved issues in income distribution” and quoted “Capital in the 21st Century” by French economist Thomas Piketty, as showing the harmful effects of inequality. Liu called for improved mechanisms to increase wages.
What Bloomberg Economics Says …
“In the short term, the objective will probably be to stimulate domestic demand through 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 vowed to “optimize the income structure and expand the middle-income group.” The Shanghai city government has included “fair” income distribution in its next five-year plan, including “excessively high income regulation”.
This will require more government intervention through taxes, say some government-affiliated economists. “When a country has a higher level of income, the government will step up its income redistribution efforts with taxation and transfer payments,” said a speech in August by Cai Fang, vice president of the Chinese Academy social sciences, an influential think tank government.
Specific measures could include an increase in the income tax of the richest, the granting of income tax credits to low-income people, the taxation of wealth such as property and the collection of charges on capital gains on financial transactions, most of which are tax exempt.
“I think the income tax is already quite progressive. The key element is the capital gains tax, ”said Gan Li, director of the Chinese Household Finance Research and Survey Center at the Southern China University of Finance and Economics. -West of China.
Beijing is committed to reducing the large gaps in the quality and coverage of public services such as health care and education between different regions. Shifting public spending towards these services could encourage households to save less of their income and spend more on goods and services.
“China’s social security spending is around 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 tax expenditure will be adjusted, ”analysts at securities brokerage Guotai Junnan wrote in a demand reform report.
Reforming the resident registration system can also improve access to social protection. In April, the government said that all cities with less than 3 million inhabitants should scrap rules that limited 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 of people.
As Beijing said this year it would rely on a “dual circulation” strategy in which economic growth becomes increasingly dependent on domestic demand rather than exports, economists expect the government to maintain high levels of investment spending, while moving away from transport infrastructure and housing towards technological and environmental projects.
However, any change in focus is likely to be gradual.
Beijing has struggled to move forward with a property tax it has been planning for more than a decade amid resistance from the wealthy and fears of falling asset prices. And the recent Communist Party meeting declared that supply-side reforms will continue to be the “main line” of policy.
“Chinese policymakers have been talking about increased consumption and demand-driven growth for decades,” said Terry Sicular, China economist at Western University in Canada. “But all the talk about it has not been successful.”
© 2020 Bloomberg L.P.