China’s economy continues to struggle, with low investment efficiency, soaring debt, and export constraints imposed by the West. In recent times, there has been a surge in discussions about promoting consumption and the possibility of cash handouts.
According to data from China’s National Bureau of Statistics, the year-on-year cumulative increase in the Consumer Price Index (CPI) in the first half of the year was only 0.1%. This figure is significantly lower than the government’s target of 3% annual inflation and below the average inflation of 2.4% over the past 20 years.
In the face of economic stagnation, various economic forums this year, including officials and economists from official think tanks, have proposed direct cash handouts to the people. In March, Professor Mao Zhenhua of Renmin University of China suggested distributing a total of 10 trillion yuan in cash subsidies (7,000 yuan per person) in batches, while simultaneously reducing infrastructure spending by 10 trillion yuan.
During the Chief Economists Forum in early August, Li Zhan, the Chief Economist of CMB Fund Research Department, proposed providing job subsidies for university students facing employment pressure and direct cash assistance for low-income groups.
State-run newspaper “China Daily” reported on August 13th that Zhang Ming, Deputy Director of the Institute of Finance of the Chinese Academy of Social Sciences, believed that the government should provide direct support to low- and middle-income groups. This could be achieved through measures like increasing fiscal deficits or issuing special national bonds to distribute consumption vouchers, with a targeted scale of at least 1 trillion yuan.
Would these proposals be realized?
As of now, the Chinese authorities have not adopted a direct “money for all” approach like some Western countries. However, many local governments have implemented multiple rounds of consumer voucher distribution covering sectors such as dining, shopping, and entertainment.
Consumer vouchers were introduced during the 2008 global financial crisis and were distributed in many places during the pandemic period, mainly led by local governments. However, the amounts were generally small, with many vouchers being discount coupons without cash value.
Last year, the authorities proposed increasing domestic demand but ultimately launched a trade-in program to encourage consumer spending without increasing people’s incomes.
In recent years, the Chinese authorities have continually rolled out billion-dollar economic stimulus plans, including issuing super long-term special national bonds annually since this year. However, most of these funds are allocated to national strategic implementation and critical infrastructure development, not related to people’s livelihoods.
Wang Tao, Chief China Economist at UBS Group, estimated that the government introduced a stimulus package of about 2.2 trillion yuan in 2020, with only 0.2 to 0.3 trillion yuan possibly allocated for assisting low-income groups through direct cash transfers or consumption subsidies.
To compete in foreign markets, boost exports, and attract foreign investment, the government provides significant subsidies to businesses, but individual subsidies are much smaller.
According to a report by CSIS in May 2022, China’s industrial subsidies in 2019 accounted for 1.73% of GDP, totaling $248 billion in nominal exchange rates, exceeding the SIPRI-reported 2019 military expenditure ($240 billion).
No country exceeds China in industrial subsidies; China’s industrial subsidies are 3.7 times that of Japan, 4.2 times that of Germany, 4.4 times that of the United States, and 6.1 times that of Brazil.
According to a report released by AidData in 2021, China spent $843 billion on bilateral foreign aid since 2000, averaging around $39.5 billion annually.
Up until 2020, only about 13 cities provided specific subsidies to low-income families, totaling less than 200 million yuan.
In 2020, Chinese Premier Li Keqiang mentioned that China had around 600 million low- and middle-income people with an average monthly income of about 1,000 yuan. In 2022, the subsidy for poor households in China ranged from 150 to 1200 yuan per year.
Economist Davy J. Wong from the United States expressed to a media outlet that the Chinese government’s expenditures on official consumption and government spending were substantial. The government’s reluctance to distribute funds to the general public reveals their adherence to social Darwinism, leaving the people to fend for themselves.
To maintain high growth, the Chinese authorities heavily invested in infrastructure and real estate in the 2010s, leading to a lower proportion of consumer demand in GDP compared to most other countries. Employment opportunities were concentrated in the construction and industrial sectors.
In response to China’s economic challenges, economists advocate for a consumption-driven economic model. However, the policies outlined by the Chinese leadership indicate their inclination towards uniquely tailored modernization, cautioning against following Western economic models.
In a May 2022 article in the “Seeking Truth” magazine, the Chinese leader mentioned the concept of “socialism with Chinese characteristics,” emphasizing a departure from welfare-oriented policies. In an article published in August last year, he reiterated the avoidance of adopting further Westernized stimulus policies and growth patterns.
At the latest economic work conference in July this year, while there was increased mention of household consumption, it does not necessarily signify the implementation of new policies to achieve structural economic transformation. The conference maintained a focus on promoting “new quality production forces” to advance scientific research and technological upgrades, highlighting the authorities’ commitment to supply-side policies.
The conference indeed emphasized the importance of policymakers focusing more on household welfare. However, lacking specific details makes it unclear how this will impact practical implementation. Overall, the policy’s central focus remains on economic security and cultivating advanced industries’ new quality production forces.
Julian Evans-Pritchard, China Economist at Capital Economics, stated that although cash handouts and vouchers could provide short-term economic stimulus, once exhausted, the economy is likely to revert to its subdued state.
Economist Yu Weixiong from the University of California, Los Angeles, noted that President Xi Jinping’s focus on developing China into a technological powerhouse requires substantial government subsidies. However, the eventual result may lead to failure, with the funds going down the drain.
He argued that redirecting resources towards new quality production forces at the expense of providing benefits to the people would result in reduced welfare for the public. This has created a distorted situation where high taxes and social security contributions prevent people from consuming, leading to weakened domestic demand.
Yu stated that while cash handouts and vouchers may provide some short-term economic stimulus, the underlying issue of excessive investment leading to long-term structural problems indicates that China’s economic woes will persist for a considerable period.
The excessive household investment in the past resulted in significant asset growth but also increased debt. Now, with the bursting of asset bubbles and shrinking assets, debts remain unchanged. The current deleveraging process necessitates belt-tightening, leading to restrained consumption and investment activities.
Yu asserted, “While cash handouts and vouchers could offer some short-term economic stimulus, once utilized, the economy is bound to return to the shadows of stagnation.”