The Chinese government has issued the “Expansion of Consumption ’15th Five-Year Plan'” as the first five-year plan to promote consumption, acknowledging issues such as long working hours, low incomes among Chinese people, and the dilemma of household assets and liabilities. However, the implementation of the policy leans towards the old path of boosting economic growth through investment. What the Chinese Communist Party (CCP) intentionally ignores is that the root of the crisis lies within itself and its policies. Because consumption does not need to be promoted through documents or policies; what the Chinese people need is confidence.
On July 13th, the Chinese government approved the “Expansion of Consumption ’15th Five-Year Plan'” submitted by the National Development and Reform Commission (NDRC) and the Ministry of Commerce. The goal of the plan is to reach a total retail sales of consumer goods of around 60 trillion yuan by 2030.
The document outlined 28 measures, including living services, the silver economy and childcare, cultural tourism and sports, promoting car consumption throughout the chain, “Artificial Intelligence + Consumption,” and more.
Under the section “Focusing on Improving Consumption Capacity,” the plan includes raising the minimum wage standards, improving wage growth mechanisms, increasing residents’ property income, and implementing the rest and vacation system. The document also mentions “implementing the rest and vacation system.”
The CCP directly acknowledges one thing: that resident consumption is insufficient, mainly due to issues with income, assets, employment, and social security. In other words, the problem lies in residents’ assets and liabilities.
A recent article in the CCP’s party mouthpiece “Seeking Truth” stated that the current consumption willingness of the Chinese people is restricted, mainly influenced by factors like job pressure, inadequate social security, and property depreciation. “It is necessary to speed up the repair of residents’ assets and liabilities… to prevent the negative spiral of asset price declines affecting consumer confidence.”
In 1997, American economist Richard Koo proposed the theory of “Balance Sheet Recession.” In 2023, Koo explained the basic principles of “Balance Sheet Recession” in his book “The Escape from Balance Sheet Recession”: during economic prosperity, people tend to leverage borrowed money to make more money. After the bubble bursts, asset prices collapse, but the liabilities remain, causing people’s balance sheets to fall into distress. Once the balance sheet is in distress, it essentially means bankruptcy.
When everyone simultaneously repairs their balance sheets, even if interest rates drop to zero, people will still choose to continue repaying debt, businesses will not borrow for development, and the public will not consume. This will lead to a severe deflationary spiral.
The five-year plan to promote consumption and the official rhetoric in state media signify a fundamental shift in the official stance on the stagnant consumption. In the past, it was often believed that people were “rich but reluctant to spend” because of the high total amount of yuan deposits. In reality, the wealth of ordinary people has been “averaged out.” Now, the authorities admit that people truly have no money, with shrinking wealth and mounting debt pressures. In this scenario, how can the goal of reaching a total retail sales of 60 trillion yuan be achieved?
Developing “Consumption Promotion” into a central-level plan covering the next five years is unprecedented. Even though the CCP has been advocating for increasing domestic demand for 28 years.
In July 1997, the Asian financial crisis erupted, causing a sharp drop in China’s external demand and a direct decline in export trade. At the same time, the CCP carried out the so-called reforms of state-owned enterprises, leading to mass unemployment and declining consumer confidence among residents.
On August 2, 1998, then-premier Zhu Rongji explicitly proposed the concept of “expanding domestic demand” for the first time. The State Council subsequently issued 100 billion yuan of treasury bonds, primarily used to increase investment in infrastructure construction. A series of macro-control policies were also implemented, including lowering interest rates for loans and increasing export tax rebate rates. Measures related to education, healthcare, and housing, all areas related to the daily lives of ordinary people, began market-oriented reforms starting in 1998, including later implementations of long holidays, etc.
It was the first time the authorities called for “expanding domestic demand,” but at that time, the so-called expansion of domestic demand meant increasing investment in infrastructure construction: railway, roads, airports, water facilities, urban development.
In September 2008, Lehman Brothers collapsed, marking the outbreak of the global financial crisis, and China’s export-oriented economy faced a severe impact. In November 2008, the CCP State Council executive meeting proposed the famous “4 trillion” investment plan aimed at “expanding domestic demand and promoting stable and faster economic growth.” The subsequent funding matched up to 30 trillion yuan.
Although the core funds of the ten measures and the vast majority of social-driven investments were still directed towards railways, roads, airports, major infrastructure, post-disaster recovery and reconstruction, and other hard asset areas. The CCP’s logic was to use massive investment to drive total demand.
Every time a crisis hits, the CCP tends to make changes. However, the CCP’s thinking logic remains unchanged. In the five-year plan to promote consumption, there is still a strong presence of old routines. When it comes to promoting consumption, the specific measures in the plan quickly shift towards commercial street renovations, logistics hubs, cold chain bases, parking lots, charging facilities, tourist areas, 5G networks, computational networks, and various infrastructure constructions.
Due to the CCP’s familiar policy execution system from top to bottom, the approach of boosting the economy through investment is deeply ingrained. Investing in a commercial district can easily show results. But improving people’s social security is difficult to measure as a political achievement. Investing in logistics hubs can directly show the amount of investment. Ultimately, the CCP may resort to the old path again, sparking another round of investment fever in various provinces and cities to promote consumption.
In the peak period of the real estate market in 2021, the real estate sector accounted for nearly 70% of residents’ assets. Local governments profited heavily from land finances. After the real estate crisis erupted, property values continued to depreciate, forcing households to repair their balance sheets due to shrinking assets. With rapid declines in China’s housing prices, residents’ wealth evaporates, consumption shrinks, local fiscal pressures and non-performing loans in banks continue to rise. At present, the repercussions of land finances are still being digested, so the chances of a rebound in Chinese housing prices are slim.
The phenomena of “996” and “involution” present a dilemma for the Chinese people and businesses. When social mobility slows down, people can only engage in excessive and meaningless cutthroat competition in the existing market, leading to physical and mental exhaustion. This “involution without consumption” not only harms individual well-being at the micro level but also suppresses residents’ willingness to consume at the macro level, leading to a continuous weakness in domestic demand.
In May 2022 during the pandemic, Chinese people expressed from their hearts, “We are the last generation,” to convey their unwillingness to let future generations be coerced by the morally bankrupt CCP, symbolizing the sorrow of the Chinese nation.
Therefore, the root of the crisis lies within the CCP and its policies. Because what the Chinese people need most is confidence, which the discredited CCP cannot provide as it falls into the “Tacitus Trap.”