China’s pledge to lift consumption sparks debate on cash handouts
CHINA’S policymakers have made it a top priority to boost consumption in the economy in 2023. Yet beyond broad pledges, they have provided little detail on specific steps to achieve that goal.
Unlike in the US and elsewhere, China is shunning the stimulus checks and consumer subsidies that fuelled post-pandemic recoveries in those economies. The government’s support has focused mainly on helping businesses cope with the slump and preserve jobs – it fears that free cash may give rise to welfare dependency and lower productivity.
The only clues so far on possible policy measures this year have come from a key economic meeting in December, where top officials listed better housing, new-energy cars and elderly-care services as areas where consumption will be encouraged. They also pledged to increase household incomes “through multiple channels”, without elaborating.
Several government-linked economists – some of whom are advisers to senior leaders – have now weighed in with their own recommendations on how best to spur spending after three years of strict Covid rules battered consumer confidence.
Some argue that consumers will feel empowered to spend only when they know their jobs and incomes are secure. Others say cash handouts are the most immediate and effective way to drive consumption when sentiment cannot be lifted quickly.
Liu Yuanchun, president of the Shanghai University of Finance and Economics, argues that although subsidising households directly with cash and coupons would stimulate consumption in the short term, there are indirect implications that could be negative for the economy.
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Consumer vouchers could cause so-called consumption displacement, he wrote in December, implying reduced demand for goods that cannot be bought with the coupons, resulting in a muted effect on spending. Cash handouts in the US and Europe also led many workers there to quit their jobs and live on the payouts, pulling down economic growth, he said.
Liu previously advised the Politburo, the Communist Party’s top decision-making body, in April on how to regulate capital. He has also attended several economic seminars led by President Xi Jinping and Premier Li Keqiang.
Government aid should be targeted towards businesses this year, Liu argues, while more should be done to help the beleaguered housing market as well, given its outsized impact on the broader economy. The property sector could drive household demand on everything from home decorations to appliances, he said.
“Greater support and subsidies must be given to medium and small-sized firms in 2023, as protecting market entities is the core pre-condition of stabilising consumption and investment,” Liu wrote.
He also suggested the creation of a special employment fund targeting migrant workers and university graduates. Investment should be made in food-for-work projects that focus on job creation and can address both unemployment and insufficient investment, he added.
Jia Kang, a former head of a research institute under the Ministry of Finance, said that boosting consumption comes down to job creation, which in turn hinges on effective investment.
“We cannot simply talk about consumption in terms of consumption,” he said last week at the Ifeng Finance Summit, an online forum. China should focus on “making the pie bigger” by expanding investment to help generate new jobs and income, and fix the social safety net to embolden households to spend instead of accumulating savings.
The government should take targeted measures to support employment of the most vulnerable groups, especially for young people, he said.
Guan Qingyou, head of Reality Institute of Advanced Finance, sees benefits in distributing cash directly to low- and middle-income groups as an interim measure before long-term solutions such as social safety net improvements and income distribution reforms are done.
“Many economists argue that consumers will spend naturally as long as they have a clear expectation that their income is guaranteed and feel the future will be better,” he said at the finance summit last week. “But isn’t the problem now that the expectation is gloomy, and that they don’t have confidence? That makes such consumption stimulus very necessary.”
He called on the government to hand out money to lower-income households each month for three to five years.
Yao Yang, dean of the National School of Development at Peking University, is another proponent of direct consumer aid.
While support for businesses, such as tax breaks to preserve jobs, should continue this year, the bottleneck curbing China’s growth is on the demand side, he argues. The government should subsidise households directly, such as distributing shopping coupons, he said at the same summit last week.
“The measures must be specific and send out the message that something big will be done, to boost consumer confidence and increase companies’ willingness to produce,” he said.
If the government gives each Chinese person 1,000 yuan (S$194) worth of consumption vouchers, that could boost sales by several times more than the face value of the coupon, resulting in a roughly 4.2 trillion yuan jump to gross domestic product, he said.
Consumption coupons that are “not too large-scale” could help, said Qian Jun, executive dean of the Fanhai International School of Finance at Fudan University, although he also added that fiscal support for smaller firms is key, as that sector is a major employer.
“I don’t think cash is a very good method because Chinese households have a very strong tendency to save,” he said on Wednesday. BLOOMBERG
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