Liu Shijun: Value consumption as much as investment was valued in the past

At the current stage, China should pay special attention to the speed of economic growth. Our country is currently at a critical period of crossing the threshold of high-income countries. Maintaining a medium-speed growth and striving to make the nominal growth rate higher than the actual growth rate is of great significance. It should be particularly emphasized that the economic growth rate cannot be too low. In the next five years, a medium-speed growth should be maintained, with a target of 5%, while 4% should be regarded as the bottom line that cannot be broken.

China's consumption accounts for nearly 20 percentage points less than the OECD average, and this is a structural deviation. The issue of insufficient consumption is mainly reflected in the service consumption sector, which is closely related to the level of urbanization. A deeper factor is the large income gap, with a high proportion of assets held by government departments, which are mainly used for savings and investment rather than consumption. Whether it is possible to narrow this gap by 15 percentage points in the near future to bring it closer to a reasonable level should become a "hard task" in stabilizing growth.

Consumption should be valued as much as investment was in the past, with the same intensity and funding directed towards the consumption sector. To fill the gap of structural deviation in consumption and stabilize and expand domestic demand, it is necessary to accelerate the urbanization process and gradually narrow the income gap, with social security issues being particularly important. Through fiscal subsidies, the transfer of state-owned capital, and the construction of pension systems, efforts should be made to increase the monthly pension of rural residents from over 200 yuan to 400 yuan within one or two years. Calculations show that this has a significant impact on the driving force of growth from various stimulus expenditures.

—— Liu Shijun, Academic Advisor of the China Financial Forty Forum (CF40), Vice Chairman of the Economic Committee of the 13th National Committee of the Chinese People's Political Consultative Conference, former Deputy Director of the Development Research Center of the State Council

\* This article is organized from the author's speech at the CMF Macroeconomic Hot Issues Seminar (Issue 100). The article only represents the author's personal views and does not represent the position of CF40 or the author's affiliated institution.

Challenges of Economic Growth and the High-Income Threshold

Our country is currently at a critical period of crossing the threshold of high-income countries, and maintaining medium-speed growth while striving to make the nominal growth rate higher than the actual growth rate is of great significance. This year's government work report proposed a 5% economic growth target, "which is a clear characteristic and policy orientation of facing difficulties and striving for progress." Although achieving this target is somewhat challenging, it is of great significance because the issue of growth rate is crucial for our country at present.

In 2021, our country was very close to the high-income country threshold, just a few hundred dollars away. However, four years have passed, and we have still not crossed it, and the gap has even slightly widened. The main reasons are: first, the impact of the pandemic has affected the actual growth rate, but from an international comparison, our actual growth rate in the past two years has not been low; second, low prices and even "deflation" have led to nominal growth being lower than actual growth; third, the depreciation of the RMB against the USD.

Currently, issues such as the difficulty in raising prices and the depreciation of the exchange rate urgently need analysis and research. The World Bank's classification criteria for high-income country thresholds are dynamically adjusted. In recent years, according to the calculation of per capita current price in USD, this threshold has been growing at a rate of about 4% per year. In other words, if our country's per capita income calculated in current price USD does not grow at an annual rate of 4%, it will be difficult to cross this threshold Nevertheless, we remain confident in crossing the threshold of high-income countries. However, compared to four years ago, when it was generally believed that China would have no major issues crossing that threshold, the current situation indicates that we must remain vigilant about the associated risks.

Recently, some viewpoints have compared China's current situation to Japan in the early 1990s; however, the two are at different stages of growth. Compared to Japan, although the bursting of the real estate bubble had a significant impact on the Japanese economy, Japan's per capita income had already exceeded $30,000 in the early 1990s, making it not only a developed economy but also surpassing the per capita income level of the United States. At the same time, Japan had a smaller urban-rural gap and had achieved integrated urban-rural development, with a relatively complete social security and welfare system. In contrast, our country has not yet crossed the threshold of high-income countries.

Therefore, at this stage, China should pay special attention to the speed of economic growth. In the past, there was an emphasis on avoiding excessively high growth rates because China had significant growth potential at that time. Now, it should be particularly emphasized that the speed of economic growth cannot be too low. At this point in time, the goal for the next five years should be to maintain moderate growth at 5%, with 4% as a bottom line that must not be breached.

Reasons and Impacts of Insufficient Consumption

In this government work report, the issue of consumption has been placed in an important position, clearly stating the need to vigorously boost consumption and listing it as a top priority in various tasks. Currently, the phenomenon of insufficient consumption in China shows a nearly 20 percentage point gap in the proportion of consumption to GDP compared to the international average, especially against the average of OECD countries. This indicates that the gap in China's consumption level is not merely a slight difference in average levels, but a structural deviation. Although there are differing opinions on this in research, the basic fact that there is a structural deviation in the proportion of consumption to GDP in China is certain.

The reasons can be attributed to multiple factors. First, there has long been a systemic mechanism and policy tendency in our country that emphasizes investment over consumption. Second, there are two issues with basic public services: one is that the overall level is relatively low, and the other is that there are significant internal disparities.

Recently, the issue of pension for the rural population has received considerable attention. Currently, the monthly pension for retired personnel in urban government agencies and institutions is about 6,000 yuan, while urban retired workers receive about 3,000 yuan; however, among the participants in the urban and rural residents' pension insurance, 95% are rural residents, whose monthly pension is only 220 yuan, resulting in a gap of 10-15 times compared to the former two. This phenomenon indicates that, although significant work has been done in the field of basic public services in recent years, there are still prominent issues in certain areas such as pension security: one is that the level is low, and the other is that the urban-rural gap is significant.

Currently, the issue of insufficient consumption in our country is mainly reflected in the service consumption sector, while commodity consumption has basically reached saturation.

Service consumption is closely related to the level of urbanization. For example, service consumption in healthcare, education, social security, culture, and entertainment is difficult to effectively carry out in traditional rural areas or counties with lower development levels. Even if residents have the willingness to consume, they are unable to realize it due to a lack of corresponding service supply or excessively high costs. Therefore, the improvement of urbanization levels is crucial for the expansion of service consumption In recent years, there has been a significant trend of population movement towards cities in China, especially towards large cities and first-tier cities. One important reason for this is that urban systems can provide a high-quality service consumption environment. Compared to OECD countries that are historically and developmentally at a similar stage as China, these countries generally have an urbanization rate of over 70%, with some countries even exceeding 80%. The latest data shows that the urbanization rate of the resident population in China is about 67%, but the urbanization rate of the registered population is only 48%-49%, which has not yet reached half.

Another deeper reason is that the income gap in China remains relatively large. Currently, the scale of the middle-income group in China is about 400 million people, while there are still about 900 million relatively low-income groups below this level.

Another reason worth noting is that, according to the "China National Balance Sheet" published by the Chinese Academy of Social Sciences, in 2022, China's total net assets were approximately 756 trillion yuan, of which the assets held by the government sector were about 291 trillion yuan, accounting for about 38%. In the state-owned sector, state-owned enterprise equity accounts for about half of government wealth, with the latest data showing that state-owned equity capital is 132.6 trillion yuan. In contrast, internationally, especially in OECD countries, this proportion usually does not exceed 10%, generally below 5%, and some countries even show negative growth due to high government debt, being in a net liability state.

Due to the high proportion of wealth held by government departments in China, this has advantages during the industrialization and investment-driven phase, as the returns on government assets are mainly used for savings and investment rather than consumption. This has also contributed to the relatively low consumption rate in China. Therefore, an important question currently facing us is: how should the wealth held by the government and the returns on state-owned capital be distributed? In the past, these returns were mainly used for investment, but in the future, they need to be more inclined towards the consumption sector to achieve a transition from investment-driven to consumption-driven growth.

Economic growth can be analyzed from two dimensions: the height of economic growth and the width of economic growth.

The height of economic growth is mainly reflected in improving economic growth efficiency through innovation, opening up to the outside world, and reform, thereby expanding the upward space for economic growth. These measures aim to optimize resource allocation and improve production efficiency, thus achieving high-quality economic development.

The width of economic growth refers to the extent to which all members of society can generate effective demand for existing production capacity. Specifically, society can be divided into ten groups based on income levels to examine the effective demand for production capacity among different groups. The width of economic growth is closely related to factors such as education, social security, human capital development, and social mobility. The issue of insufficient consumption is largely related to the significant income gap and essentially reflects insufficient economic growth width.

Recently, there have been some encouraging new developments in China's innovation sector. For example, the emergence of new technologies such as DeepSeek and humanoid robots shows great development potential and deserves recognition and focused development. However, these innovative achievements mainly reflect the height of economic growth. For instance, the development of artificial intelligence and humanoid robots may replace some existing jobs, leading to unemployment for some individuals and a subsequent decrease in income, which may further highlight the issue of insufficient economic growth width Therefore, when analyzing the economic situation, we should clarify the progress in economic growth levels, including innovative achievements, which cannot replace the resolution of economic breadth issues.

Some viewpoints suggest that the low proportion of consumption in China's GDP has not emerged recently, but has existed for at least the past two to three decades. However, China's economy maintained a high growth rate in the past. This can be explained by the concept of "final demand."

In the composition of GDP, after deducting productive investment, the sum of consumption and non-productive investment (mainly including real estate and infrastructure) constitutes final demand. Over the past years, real estate and infrastructure have developed rapidly, and from an international comparison perspective, there has even been a certain degree of overdevelopment. However, the growth momentum of these two has currently declined, especially with a significant drop in real estate, highlighting the structural shortcoming of the low proportion of consumption in GDP.

Currently, China's economy faces numerous issues, including low prices, the gap between nominal growth and actual growth, excessive debt, and overcapacity, all of which point to insufficient final demand as the root cause. If the structural bias of low consumption in GDP is not taken seriously and addressed, it will be difficult to enhance final demand, and expanding domestic demand and economic growth will face severe challenges.

At present, the connotation of expanding consumption and emphasizing people's livelihood issues may need to be readjusted. This involves not only moral considerations or sympathy for low-income groups but, more importantly and urgently, an issue of economic growth rate. If this issue is ignored and no significant adjustments are made, the structural bias of low consumption in GDP will be difficult to resolve. Therefore, consumption should be valued as much as investment was in the past. In the past, during economic downturns, investment was increased to drive economic growth; now, the same intensity and funding must be directed towards the consumption sector. If this shift cannot be achieved, the issue of insufficient domestic demand will be hard to improve.

Strategies and Suggestions for Expanding Consumption

Therefore, the next step should be to adjust the structural bias of China's consumption level to a normal level. For example, the current proportion of consumption in GDP is 20 percentage points lower than the international average; whether this gap can be narrowed by 15 percentage points in the near future to approach a reasonable level should become a "hard task" in the recent efforts to stabilize growth.

Next, to fill the gap of the structural bias in consumption and stabilize the expansion of domestic demand, multiple efforts are needed, including accelerating the urbanization process and gradually narrowing the income gap, with social security issues being particularly important. Social security covers a wide range of content; for example, currently, 1.07 billion people in China participate in pension insurance, of which 550 million participate in basic pension insurance for urban and rural residents, accounting for more than half of the national population. About 170 million people receive a monthly pension of 220 yuan, with annual expenditures of approximately 500 billion yuan. Specific measures include:

First, allocate a portion of the existing stimulus policy funds, such as 500 billion yuan, to inject into the basic pension insurance fund for urban and rural residents to increase the pension for 170 million people from 220 yuan to 400 yuan, roughly doubling it Secondly, there has been considerable recent discussion about the large-scale transfer of state-owned capital to pension funds, focusing on the basic pension insurance fund for urban and rural residents.

In addition, in cities, especially in areas where migrant workers are widely employed, it is necessary to gradually improve the social security system, particularly the pension contribution mechanism. Some progress has already been made in this regard.

In short, government financial subsidies, the transfer of state-owned capital, and the construction of the pension system all need to be accelerated, with multiple measures taken to strive to increase the monthly pension for rural residents from over 200 yuan to 400 yuan within one to two years. Although the doubling seems significant, due to the low base, it will only amount to 400 yuan after the increase. If the pension is raised to 600 yuan over three years, reaching the current minimum living standard in rural areas, this level is still not high. Furthermore, can it be increased to around 1,000 yuan in the subsequent two years? Even so, there remains a multiple gap compared to urban retirees and employees of government and public institutions.

Calculations show that rural residents, as the lowest income group in China, have a high consumption propensity. For example, if 10 trillion yuan is provided to them, their consumption propensity is about 0.8, meaning they would spend 8 trillion yuan on direct consumption. From an academic perspective, the consumption multiplier effect is roughly 1.5, which could drive GDP growth by about 1.2 trillion yuan. This would provide nearly 1 percentage point of support for annual economic growth, ranking high in the pull effect of various fiscal expenditures on growth, and is of significant importance for stabilizing economic growth.

Author of this article: Liu Shijin, Source: China Financial Forty Forum, Original Title: "Liu Shijin: Value Consumption as Much as Investment in the Past"

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