China’s economy continues to struggle, with market confidence lacking and weak consumer spending. Earlier this month, Liu Yuanchun, the President of Shanghai University of Finance and Economics, stated that under the current framework of “strong government, wealthy corporations, and poor residents,” the proportion of residents’ income to the Gross Domestic Product (GDP) is relatively low, leading to a low consumption rate among residents. The solution lies in adjusting income distribution.
On November 6, Liu Yuanchun delivered a speech titled “Short-term and Medium-term Policy Options for Expanding Consumption” at the 8th Hongqiao International Economic Forum, where he analyzed the core issues behind the low consumer spending among residents.
He presented various data and discussed the “typical facts” of consumption in China.
The first fact is that China has a low consumption rate.
Liu Yuanchun pointed out that currently, China’s final consumption rate (the proportion of final consumption to GDP) is about 55%, whereas in typical developed countries, it is around 80%. Another indicator is the proportion of residents’ consumption to GDP, which in China is only 39.9%, compared to 50-55% in Japan, 64.6% in South Korea, and even higher in the United States at 68%.
Additionally, compared to developed countries, government consumption in China accounts for a higher percentage, reaching 30%, while private consumption is less than 70%. Due to the overall low consumption rate, the proportion of residents’ consumption to GDP in China remains below 40%, which is lower than the global average of around 55%.
Another fact is insufficient consumption.
Liu Yuanchun stated that this is mainly reflected in the rapid decline in consumption growth, which is not in line with GDP growth. Moreover, passive inventory investment, price declines, and a decrease in industrial capacity utilization also indicate insufficient overall demand.
When analyzing the reasons for the low proportion of residents’ consumption, Liu Yuanchun pointed out that the key issue lies in the disproportionately low share of residents in the initial distribution.
In China, the residents’ sector accounts for 60.6%, which is 5.5% lower than the world average; the corporate sector accounts for 24.7%, which is 5.6% higher, and the government sector accounts for 24.7%, which is 0.1% higher. Compared to developed countries, the disparity is more pronounced, with the residents’ income share in the United States at 78%, in Germany at 73.2%, both more than ten percentage points higher than in China.
Liu Yuanchun pointed out that as the share of residents’ income decreases, the proportion of residents’ consumption expenditure continues to decline, indicating that “China has still been facing the deterioration of income distribution in recent years.”
He presented charts showing that the “Three Books of Finances” (government expenditure) of the Chinese Communist government accounts for the highest proportion of GDP, reaching 36%, while residents’ income accounts for only around 43% of GDP, hence the essential nature of the low consumption rate as a distribution problem.
Liu Yuanchun’s conclusion is clear: the root cause of insufficient consumption is not that consumers are unwilling to spend money, but rather that they “do not have enough money to spend.”
In the short term, Liu Yuanchun also listed seven issues facing Chinese consumption, including the exacerbation of consumption insufficiency, stagnant consumer confidence, shrinking income distribution among the population, changes in residents’ balance sheets, significant downgrading of consumption levels, weak consumer spending in first-tier cities, and the sluggish consumption related to real estate. In the medium to long term, income distribution reform is “very important”.