China’s drive to boost consumption hinges on better social welfare and rural incomes

Spending will remain restrained unless an improved social security system frees up savings and rural development raises incomes for the poor

Winston Mok

Published: 6:45am, 11 Nov 2020

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China must develop its plans for the next five years and towards 2035, with an aspiration for national rejuvenation, in a much more hostile and uncertain external environment. A White House led by a less mercurial American president may make any China containment measures less confrontational, but they could be more effective. Understandably, Beijing has made domestic consumption a centrepiece of its “dual circulation” strategy.

The scale of China’s economy, unlike in Singapore or South Korea, means it cannot rely on exports forever. Domestic-oriented growth is feasible as China becomes the largest consumer market in the world.

From the China International Import Expo, which concluded in Shanghai on November 10, to the online shopping frenzy in the run-up to Singles’ Day, we are witnessing the tremendous potential and realisation of Chinese consumer power.

But perhaps more than the quantity or quality of Chinese consumption, it is its streamlined form that is truly remarkable. China’s new flexible manufacturing makes it possible for personalised, even made-to-order goods to be delivered from factories-cum-online shops directly to consumers.

Consumption as an economic growth engine is not a new idea for China. In place of a reliance on investments and exports, China’s top leadership first broached the idea of consumption-driven growth some 15 years ago. China’s consumption, as a percentage of its economy, is unusually low, (39 per cent in 2019) an improvement from 33.8 per cent in 2010, but still far below the 67 per cent in the United States and 69 per cent in Hong Kong.

Even though consumption has been a major driver of China’s economic growth in the past few years, this must be seen in a historical context. Since China joined the World Trade Organization in 2001, its net exports and investments have surged, but at the expense of household consumption, which declined from 46.4 per cent of gross domestic product in 2000 to 33.8 per cent in 2010.

Consumption was even higher, at more than 50 per cent of GDP, in the early years of economic reforms in the 1980s. Since then, it has been in decline for three decades until a modest recovery in the last decade.

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Why has China not succeeded in increasing consumption as a share of its economy? One explanation is its very high national savings rate, which was 45 per cent of GDP last year. In comparison, Germany, which is known for its fiscal prudence, had national savings of 25 per cent of GDP.

China’s high household savings is a key factor. Shaped by limited social security, the previous one-child policy and the traditional idea that children provided for elderly parents, people saved more rather than raised a larger family.

Also, government savings are high and this is associated with China’s underdeveloped social security. If the government spent more on social security, citizens would need to save less.

Meanwhile, household incomes are low. China’s disposable household income constituted just 43 per cent of GDP last year. The reasons are complex. Some may be transitional, the result of China’s rapid industrialisation and urbanisation. Until recently, surplus labour kept wages low, and urbanisation, while lifting households’ incomes, often depressed their labour share in output.

Other structural factors may be in play. China’s economy may be inefficiently capitalised and some state-dominated sectors may extract monopoly profits from the economy. But an important factor is the heavy burden of social security contributions on both employers and employees.

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During the era of Hu Jintao and Wen Jiabao, many attempts were made to improve the lot of poor households. The agricultural tax was abolished. Local governments were banned from collecting fees from rural households. The minimum living standard guarantee (dibao) social welfare programmes were introduced and expanded. Despite the progress, income and welfare inequality has persisted.

In the outline of China’s latest five-year and long-term plans, many pundits focused on its greater emphasis on technological self-reliance. Yet plans to prioritise rural development and improve the multilayered social security system have gone largely unnoticed. These development initiatives are just as crucial to the success of China’s dual circulation strategy.

Rural residents make and spend at least 40 per cent less than their urban peers. China’s economic growth was once driven by surplus rural labour becoming productive factory workers in its industrialisation drive. In this age of deglobalisation and automation, in an environment where China’s rising labour costs are driving production offshore, such a path has run its course. Rural incomes must be raised by modernising agriculture and rural development.

China’s social security system is more local than national, with a large urban-rural divide. While Shanghai residents may enjoy world-class social welfare benefits, rural residents have access to far less. For example, urban residents receive pensions about 20 times that of their rural counterparts. China’s poorest, in some respects, can rely on the state the least.

Economic development and social welfare constitute a chicken-and-egg problem. In its current stage of economic development, China cannot provide all citizens with Singapore-level social welfare without bankrupting the country. But its highly unequal social welfare system has become a key impediment to greater consumption.

The success of China’s consumption-driven growth strategy may hinge on how effectively it can coordinate the evolution of social welfare and economic development.

Winston Mok, a private investor, was previously a private equity investor

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