Why does the Chinese Communist Party refuse to loosen the reins for Chinese consumers? Some analysis suggests that the leader of the CCP’s economic policies have trapped the political system, and the treasury does not have enough money for continued extravagances. In this background, giving the green light to consumption is an unattainable task.
According to the Financial Times, analysts believe that the CCP leader feels safer the more control China has over the global supply chain, especially amid escalating tensions with the United States. This has led to a greater emphasis on investment, particularly in technology, rather than consumption.
Many domestic and foreign economists believe that Beijing should promote domestic consumption in China. However, from start to finish, the CCP has been playing small in stimulating consumption, avoiding radical stimulus measures like directly providing cash subsidies to consumers or deepening economic reforms. Instead, the CCP leader has proposed the “new three items,” aiming to increase investment and exports in industries such as electric vehicles, photovoltaics, and batteries.
Analysts suggest that the reasons the CCP lacks more aggressive action towards consumption include ideology and geopolitics, but more importantly, China’s economy has long relied on state-led investment promotion, making reform now a challenging endeavor.
Regardless of the reasons, the pressure on Beijing to find new growth modes is becoming immense. As US Treasury Secretary Janet Yellen said during her visit to China, China has become too large, with no trading partner able to absorb its surplus capacity.
Michael Pettis, a senior researcher at the Carnegie Foundation in Beijing, told the Financial Times, “Ultimately, the exit strategy has to be consumption – if nobody buys, then producing all these things is meaningless.”
Pettis pointed out that signs of overinvestment are now “ubiquitous” in China, from the real estate industry to excess infrastructure, with debt accounting for about 300% of GDP. “You can see that investment is no longer the solution.”
A report by Rongding Group titled “Surplus Capacity Is Coming” indicated that in 2023, as China’s economic growth continued to disappoint, Beijing still focused its policies on producers.
The report found that in early 2023, China’s industrial capacity utilization rate fell below 75% for the first time since 2016, with companies still increasing inventory, while 20% of enterprises reported operating losses.
“I think part of the reason is ideological,” said Camille Boullenois, co-author of the report, referring to the preference for manufacturing and investment.
According to the International Monetary Fund, China’s investment accounted for over 40% of GDP in 2023, one of the highest ratios globally, while private consumption accounted for only 39% of GDP. In contrast, consumption in the United States makes up 68% of GDP.
US Secretary of State Antony Blinken pointed out in Beijing last week, “China accounts for one-third of global output, but only one-tenth of global demand, creating a clear mismatch.”
Xu Gao, chief economist at Bank of China International, recently stated at Peking University’s National Development Institute that China has a high national saving rate, with savings exceeding 47% of GDP by 2022, twice the world average, and a sign of China’s economic issues.
High Chinese savings rates are due to a lack of good investment options, especially in a sluggish real estate market, and inadequate social welfare and healthcare. According to the IMF’s calculations, Beijing allocates 8% of its GDP to social security plans, only half of Japan’s. When per capita is considered, the situation is even worse.
Some scholars suggest that this may be part of the CCP’s preparations for extreme scenarios like armed conflict, as self-sufficiency in manufacturing is seen as important.
Since the mid-2000s, the CCP has reduced its reliance on the global supply chain and focused on self-sufficiency.
Professor Chan Chi-wu, a finance lecturer at the University of Hong Kong, stated that China has been considering “a military-oriented industrial policy shift” for at least 8 to 10 years.
Chan explained that Beijing does not measure “national strength” in pure economic terms but values military capabilities. “This is why manufacturing is very significant.” In the CCP’s worldview, consumption is secondary.
Western business representatives note that the reality of trade imbalances with China is far more severe than the data reflects. Jens Eskelund, chairman of the China-EU Chamber of Commerce, stated that for every container of goods Europe sends to China on average, China sends four back to Europe.
“We see widespread surplus capacity,” he said.
Economists agree that for consumers to confidently increase consumption, especially after a downturn in the real estate market, China needs to increase the development of social welfare programs and healthcare. However, such solutions will take time to boost consumer confidence and require substantial new funding from already depleted government coffers.
The Financial Times stated that increased consumption will inevitably mean a reduced role for manufacturing or investment in the economy. Pettis suggests that theoretically, Beijing can transition towards consumption by ending complex subsidies to producers.
However, doing so in a big bang manner would increase the share of household consumption in GDP while contracting the overall GDP, affecting manufacturers. For Xi, this is clearly not a politically preferable choice.
“They are trapped in this system,” Pettis remarked.
While the debate on new growth models continues, the risk lies in overinvestment in manufacturing exacerbating China’s deflationary pressures, making private investors wary and potentially leading to a slowdown in economic growth. This would not only harm China’s growth but also global growth.
The Financial Times’ article “Why Xi Jinping is Afraid to Stimulate China’s Consumption” has sparked heated discussions online. Christopher Balding, founder of New Kite Data, commented on social media that he believes Xi is essentially helpless, unable to do much or accomplish anything.
He mentioned that even if Xi fully agreed to transition to a consumer economy and intended to increase social security expenditures to encourage Chinese consumers to save less, the result would be bankrupt provinces and similar issues with health insurance and unemployment after just a few years due to the high national deficit.
“The reality is, even if Xi really wanted to (promote consumption), he would face enormous obstacles, and he is not truly willing now, not because of anything special, but because this is the essence of communism,” Balding wrote. “It’s not a secret; communists have never cared about consumer welfare and free market competition. Don’t expect them to start now.”
Desmond Shum, author of “Red Roulette” and former member of the Beijing CPPCC, also commented that “if Beijing wants to focus on consumption, it needs to restructure the entire bureaucratic system and associated power structures.”
“With power bases, the bureaucratic system has vested interests. That’s why corruption has remained rampant in China even after millions have been caught for corruption in the past decade. This production-oriented socioeconomic structure has been in existence since 1949. The CCP relies on this foundation to govern China,” he wrote.