Analysis – Painful policy options loom after China’s ‘monumental’ consumer stimulus plan

BEIJING/HONG KONG (Reuters) – China’s stimulus plans to pad consumers’ pockets to meet its 2024 growth target are breaking away from a decades-old policy manual, but for household demand to become a sustainable driver of development instead of investment is a long road paved with difficulties. elections.

Reuters reported last week that Beijing plans to issue about 2 trillion yuan ($284 billion) worth of sovereign bonds this year, in part to subsidize purchases of consumer goods and child support, effectively transferring funds to households .

It marks a shift toward boosting consumption that many economists have called on Beijing to pursue for more than a decade, warning that otherwise China could be headed for a prolonged period of low growth, as seen in Japan in the 1990s.

“It’s monumental — a landmark event that the political mindset has reversed,” said Tianchen Xu, an economist at the Economist Intelligence Unit.

The tension lies in a 1980s growth model that many economists say relied too much on investment in property, infrastructure and industry at the expense of consumers.

Economists say this model has created overcapacity in infrastructure and manufacturing and led to staggering and unsustainable debt growth since the global financial crisis as returns on investment have eroded.

While this year’s consumer-focused efforts are likely to be enough to bring China’s growth back to around 5% in 2024, after below-forecast data in the past few months cast doubt on that target, they hardly change the longer-term outlook .

Household spending in China accounts for less than 40% of annual economic output, about 20 percentage points below the global average. Investment, by comparison, is 20 points higher.

Closing this gap cannot happen overnight. It took Japan 17 years to increase consumption’s share of its economic output by 10 percentage points from its low in 1991, says Michael Pettis, senior fellow at Carnegie China.

The latest fiscal effort “isn’t really part of a real structural rebalancing,” Pettis said.

“Rebalancing will require a change in the economic model that reverses decades of explicit and implicit transfers where households have subsidized investment and production.”

STRUCTURAL PROBLEMS

The current socioeconomic policy architecture is built to support investment, not consumption.

For decades, households have been squeezed by low deposit rates, weak labor rights and farmers’ land rights that contribute to low incomes and a fragile social safety net.

The tax system encourages high investment and low wages.

The story continues

China taxes capital gains at 20%, lower than 30% in India and 37% in the United States. China’s top personal income tax bracket is among the steepest in the world at 45%.

Businesses, especially in strategic industries, frequently receive tax breaks and other incentives from central and local governments. Supporting strategic sectors, or what Beijing calls “new productive forces” such as electric vehicles, green energy or robotics, are part of technological advancement efforts that China considers vital to national security.

Re-imagining the policy playbook to empower consumers would require a major coordinated effort by authorities over many years, analysts say.

Not to mention the risks.

“The ‘right’ way to rebalance the economy in relation to consumption would be to stop subsidizing manufacturing companies with household money,” says Juan Orts, China economist at Fathom Consulting.

“What would result is a shrinking of the size of the manufacturing sector, leading to a sharp drop in investment and therefore a recession,” Orts added.

Orts, however, predicts that China is more likely to opt for a prolonged period of rebalancing, leading to “japonification”.

To fund the latest fiscal push this year, Beijing is expected to issue more debt rather than alter the mechanisms for distributing income between businesses, the government and households.

“The central government can probably finance fiscal transfers for a few more years,” said Carnegie China’s Pettis.

“But unless Beijing transforms its growth model, imbalances will continue to grow, in which case China risks facing the same problem in the future as it does now, only without a clean central government balance sheet to help it manage the potential. disturbances”.

(Reporting by Reuters staff, graphics by Kripa Jayaram; writing by Marius Zaharia; editing by Himani Sarkar)