Richard Yu: How to Boost Consumption?

Mid-year, it is once again a critical moment for reviewing macroeconomic policies.

In 2025, the global tariff war initiated by Trump had an unprecedented impact on China's exports, and the domestic real estate market has yet to show signs of recovery, increasing economic uncertainty. According to data from the National Bureau of Statistics, China's GDP (Gross Domestic Product) grew by 5.3% year-on-year in the first half of the year, with 5.4% in the first quarter and 5.2% in the second quarter.

In the first half of the year, among the "three drivers," consumption contributed 52% to economic growth, investment contributed 16.8%, and exports contributed 31.2%. In the second quarter, consumption's contribution to economic growth was 52.3%, slightly up from the first quarter, while investment contributed 24.7% and exports contributed 23%. Consumption is the main driving force behind GDP growth.

The "disruption of national subsidies" has also brought the discussion of "how to sustain consumption" back to the forefront. Yu Yongding, an academic advisor at the China Financial Forty Forum (CF40) and a member of the Chinese Academy of Social Sciences, told Caijing that in the long run, the relationship between investment and consumption is essentially a choice between "consuming now or consuming less now but more in the future."

Yu Yongding believes that China's consumption rate is not significantly different from that of similar countries in terms of per capita income levels, but we indeed have much work to do in narrowing the income gap.

From the perspective of macroeconomic regulation, promoting consumption and increasing the growth rate of consumption is entirely correct. However, in the face of economic pressure, directly promoting consumption faces many challenges. He believes that infrastructure investment should play a greater role in stimulating economic growth. The space for infrastructure investment in China is far from "saturated." Given the severe external challenges China faces in 2025, he suggests that the government could arrange some large projects similar to those executed during the "4 trillion stimulus plan" period in the 15th Five-Year Plan.

Q: Economists at home and abroad generally believe that China's previous "investment-driven" growth model has come to an end, and that China's economic growth model should shift from "investment-driven" to "consumption-driven." What are your thoughts on this?

Yu Yongding: There is no such thing as a "consumption-driven" growth model. The most discussions about "consumption-driven" growth come from American economists, such as Krugman, who claims that China's long-standing "investment-driven" growth model has brought the Chinese economy to the brink of a financial crisis; Summers believes that China's "investment-driven" growth model has reached its end.

When Western academia discusses China's "investment-driven" growth, they refer to China's economic growth strategy and growth model. This is fundamentally different from macroeconomic policies aimed at achieving a specific economic growth target in a given year, such as how to achieve a 5% GDP growth target in 2025 by increasing the growth rate of consumption.

The former is a medium- to long-term economic growth issue, focusing on how to continuously enhance economic strength from the supply side; the latter is a short-term macroeconomic regulation issue, focusing on how to overcome insufficient effective demand under given supply capacity conditions to ensure that the actual annual economic growth rate equals or approaches the potential economic growth rate from the demand side Among all economic growth theories, from classical economics to Marxist political economy to modern economic growth theories, no theory posits the existence of "consumption-driven" economic growth. The experience of China's reform and opening up also tells us that without a high investment rate based on a high savings rate, it would have been impossible for China to transform from the 11th largest economy in the world, ranked after the Netherlands, to the world's second-largest economy with a strong manufacturing sector and a complete industrial chain in just over 40 years.

Some economic activities or products may simultaneously possess the dual nature of both investment goods and consumption goods. For example, fitness expenditures can be viewed as pure consumption expenditures or as investments in human capital. If consumption has a "pull" effect on economic growth—or helps to enhance potential economic growth, this "pull" should be realized through the improvement of human capital. However, the extent to which this type of "consumption" contributes to economic growth still requires further research.

Economic growth theory tells us that output is determined by capital, labor, and technology. The growth rate of output (or potential GDP—here not considering demand constraints) depends on the growth rates of K, L, and T, namely the speed of capital accumulation, the growth rate of effective labor, and the speed of technological progress. The variables driving economic growth are capital, labor, and technological progress, not consumption.

American economist Barro explicitly states in his famous textbook "Economic Growth" that cross-country empirical evidence indicates that the amount of consumption expenditure has a negative impact on economic growth. Different countries rely on capital, effective labor, and technological progress differently at different times, thus forming distinctions and choices between "investment-driven," "human capital-driven," and "technology-driven" growth. However, there is fundamentally no choice between so-called "investment-driven" or "consumption-driven" growth.

When actual output is below potential output (insufficient effective demand), increasing consumption demand can absorb idle capacity, allowing actual economic growth to reach or approach potential economic growth, but consumption itself cannot raise the potential growth rate. For thousands of years before the Industrial Revolution, the vast majority of output was used for consumption and simple reproduction, and the economic growth rate was nearly zero. "Consumption economy" is merely a synonym for "zero-growth economy."

If one asks, "What should the growth rate of consumption be to achieve a 5% GDP growth target?" no one can answer, because the former does not depend on the latter at all. In fact, in various economic growth models, from simple to complex, there is fundamentally no explanatory variable for consumption, making "consumption-driven" growth impossible to discuss.

Q: Even if there is no such growth method as "consumption-driven," the ultimate purpose of production is consumption, right? How do you view the relationship between consumption and investment?

Yu Yongding: In the short term, as a resource allocation issue, there is a trade-off relationship between consumption and investment: capital, labor, and technology are either used to produce consumer goods or to produce capital goods. However, in the long term, there is no such trade-off issue between the two. The relationship between investment and consumption is essentially a choice between "consuming now or consuming less now but consuming more in the future." The dialectical relationship between investment and consumption has long been clarified by predecessors Marx pointed out that "without consumption, there is no production, because if there is no consumption, production has no purpose," but "the expansion of production depends on the transformation of surplus value into additional capital, that is, it depends on the expansion of capital as the basis of production." "Capital expansion," by definition, is investment.

Pavlovik proposed the concept of roundabout production in "Capital and Interest," pointing out that one must first produce means of production (capital goods) and then use these means of production to produce consumer goods. For example, Robinson initially caught fish by hand, only managing to catch a few each day. Later, he made fishing nets, increasing his daily catch to 50 fish, and then he built rafts and fishing boats, significantly increasing his catch.

Soviet economist Feldman proposed in 1936 that if more capital goods are allocated to the capital goods production sector (i.e., more investment in the production of investment goods), the output of the consumer goods production sector will be less. However, due to the rapid growth of capital goods output, even if the allocation ratio remains unchanged, the capital goods used for consumer goods production will also grow rapidly. Over time, the scale of consumer goods output will also increase, eventually catching up with and surpassing the scale of consumer goods that could have been produced if more investment had initially gone into consumer goods production.

Both theoretical and empirical research results indicate that in the long term, the relationship between consumption and investment is not an opposing either-or relationship, but rather a relationship of "consume more now, consume less in the future, or consume less now, consume more in the future." There is no "good" or "bad" distinction between consuming more now or consuming more in the future; how to balance between "now" and "future" is a public choice issue determined by the public's "vote with RMB." Savings should be autonomously decided by residents rather than enforced by the government in some way. If the public believes that China's current savings rate is too high and wishes to increase the consumption rate, there is no problem with that. Conversely, there should also be no problem if the opposite is true.

Secondly, the disposable income of residents should be appropriate in relation to GDP, neither too high nor too low. However, what is considered appropriate is not only an economic issue but also a geopolitical issue. The savings rate can be decomposed into a fundamental savings rate determined by cultural, social, and economic growth trends, and fluctuations in the savings rate caused by economic cyclical fluctuations. If a high savings rate is due to a fundamental savings rate that is higher than that of other countries in the world, the government does not need to deliberately lower the savings rate. If the increase in the savings rate is due to "cyclical" reasons (such as being affected by a certain shock, a decline in economic growth, worsening income expectations, and residents reducing consumption—Keynes's paradox of thrift), the government needs to conduct counter-cyclical adjustments to encourage residents to increase their consumption rate and lower their savings rate.

Generally speaking, as per capita income levels rise, the investment rate (capital formation/GDP) tends to gradually decline, but it is difficult to determine the optimal level of investment rate. In the long term, the consumption rate is relatively stable. In the short term, due to various shocks, the consumption rate may experience significant fluctuations. What the government can do is to adhere to the principles of a market economy while using macroeconomic policy tools to implement counter-cyclical adjustments, smooth out economic fluctuations, and stabilize consumer and investment confidence Denying the existence of a "consumption-driven" growth model does not mean that more investment is always better. The relationship between investment and economic growth is not simply positively correlated. Theoretically, there is an optimal value for the investment rate. An excessively high investment rate may lead to a decline in investment efficiency, resulting in a decrease in economic growth rather than an increase. For a considerable period before the reform and opening up, there was an overemphasis on savings and investment, which ultimately led to a situation where haste makes waste. Such lessons should not be forgotten.

Q: Some economists believe that China's consumption rate has been too low for a long time and that China should be built into a consumption-driven economy. What is your view on this?

Yu Yongding: In 2022, China's GDP was 70.6% of that of the United States; however, final consumption was only 43% of that of the United States (exchange rate 1:7). In the same year, China's consumption rate (the proportion of final consumption in GDP) was 53.2%, while that of the United States was 82.9%. In 2022, China's total retail sales of consumer goods amounted to 44 trillion yuan, while the total consumption expenditure on goods and dining in the United States was 7.2 trillion USD. It can be roughly estimated that China's total retail sales of consumer goods are 87.4% of that of the United States (due to differences in definitions, they are not completely directly comparable). It appears that China's consumption rate is too low.

However, it should be recognized that the consumption structures of China and the United States are very different. The proportion of service consumption in final consumption in the United States is much higher than that in China, typically between 60%-70%, while the per capita service consumption expenditure of Chinese residents accounts for only over 40% of per capita consumption expenditure. Considering the differences in consumption structures between China and the United States and the fact that service consumption prices in the United States are much higher than in China, it can be inferred that the gap in the proportion of consumption in GDP between China and the United States is not as large as it appears.

Our own experience also allows us to perceive that the prices of services in Western countries such as the United States (such as housekeeping, home repairs, delivery, cinema, legal fees, etc.) are significantly higher than in China. For example, in Los Angeles, the average service fee for an ambulance trip is about 1,200 to 1,300 USD. In Guangzhou, the fee for transporting a patient for about 5 kilometers, with one doctor and one nurse dispatched, is 148 yuan.

Chinese residents are more inclined to purchase physical consumer goods, such as cars and televisions, while American residents tend to prefer service consumption, such as legal, financial, and entertainment services. The expenditure on consumer goods in China significantly exceeds that in the United States in terms of GDP proportion. In 2022, China's GDP was about 70% of that of the United States; total retail sales were 87.4% of the United States' consumption expenditure on goods (including dining). Roughly estimated, based on the proportion of goods consumption to GDP, China is about 1.25 times that of the United States. If real estate consumption is included in household consumption, China's consumption rate would be much higher than the figures currently published by the National Bureau of Statistics.

In terms of physical indicators, Chinese residents' consumption is not lower than that of developed countries and is even ahead of the United States in some aspects. The World Bank's 2021 International Comparison Program (ICP) prices show that China's actual consumption in housing, education, leisure, and healthcare is more than twice the consumption measured at market exchange rates. China's life expectancy is higher than that of the United States (2021: 78.2 years vs. 76.1 years), which also illustrates the point In summary, from the perspective of long-term economic growth, there is still room for improvement in China's consumption level based on its current per capita GDP. However, from the perspective of consumption rate, the difference between Chinese residents' consumption and the world level is not very significant.

Building China's economy into a "consumption-driven" economy seems to have become a widely accepted notion. What is a "consumption-driven" economy? It is said that the main characteristics of this model are: a high proportion of consumption expenditure in GDP (high consumption rate) and a high contribution to economic growth, serving as the core driving force for economic development.

One problem with this view is the confusion between short-term demand and long-term supply issues. Consumption expenditure can only compensate for insufficient effective demand, bringing economic growth to its potential rate. In the long run, the "pulling" effect of consumption expenditure on economic growth is zero—if not negative, as Barro suggested. This point has been discussed and does not need further elaboration.

Another problem with this view is the confusion between the level of consumption rate and the level of consumption. Whether a country is wealthy and has a high standard of living should be assessed based on its consumption level rather than its consumption rate. Comparing consumption rates across different countries does not illustrate much. The countries with the highest consumption rates may very well be those trapped in poverty. For example, some low-income countries in sub-Saharan Africa often have consumption rates exceeding 80%-100%. In stark contrast, East Asian countries, influenced by Confucian thought, generally have higher savings rates (lower consumption rates), and high investment based on high savings is one of the important reasons for the East Asian miracle, allowing them to enjoy a higher standard of living.

In China, a more concerning issue in the consumption sector is income distribution. In recent years, although China's Gini coefficient has decreased, it remains at a relatively high level. Data from China Merchants Bank shows that 2.4% of Jin Kui Hua customers hold 81.8% of savings assets. According to Professor Li Shi's research, over the past 20 years, China's income gap has first risen, then fallen, and is now at a relatively stable high level. The Gini coefficient in 2008 was 0.491, close to the 0.5 level. However, since then, the Gini coefficient has shown a slow decline, with a decrease of less than 3 percentage points over seven years. Since 2016, China's Gini coefficient has fluctuated between a relatively stable range of 0.46-0.47, and since then, there has been no further trend of narrowing income disparity; the income gap remains at a high level.

If a country's Gini coefficient for income disparity exceeds 0.5, it indicates that the country has extreme income distribution inequality. Reducing income disparity is not only related to social fairness and justice but also helps to improve the marginal propensity to consume across society. From a macroeconomic regulation perspective, narrowing income distribution gaps, i.e., increasing income distribution equality, contributes to enhancing the overall society's marginal propensity to consume. However, achieving income distribution equality involves various issues such as tax system reform and social security system reform, making it difficult to accomplish in one go and challenging to play a significant role in enhancing the overall society's consumption propensity in the short term While I clearly do not agree with the "consumption-driven" growth model or strategy, I fully support the current macroeconomic policies aimed at expanding consumption, increasing the growth rate of consumption, and enhancing the contribution of consumption to GDP growth. The final consumption growth rate for 2024 is projected to be 3.87%, significantly lower than the 5% GDP growth rate. If it were not for the surprisingly rapid growth in net exports, achieving the 5% GDP growth target for China in 2024 would be difficult.

The growth rate of China's net exports in 2025 will be significantly lower than in 2024. Since consumption accounts for about 56.2% of GDP, if the growth rate of consumption cannot reach around 5%, the pressure for investment growth, especially in infrastructure, will greatly increase. Of course, if the growth rate of consumption demand cannot be further increased, the growth rates of other components of total demand will need to rise. From the perspective of short-term macroeconomic regulation, the issue is not whether to expand consumption and increase the growth rate of consumption, but how to increase the growth rate of consumption.

Q: The economic growth target set for China in 2025 is 5%, but under the shadow of the China-U.S. trade war, the uncertainty of exports is very high. In the current situation, how can we stimulate domestic consumption?

Richard Yu: As an important part of short-term macroeconomic policy, it is entirely necessary to take various measures to vigorously promote consumption growth. The problem is that consumption is a function of residents' income, income expectations, and wealth or permanent income. Specific measures to promote consumption, scholars mainly suggest issuing consumption vouchers, reducing personal income tax, and reforming the social security system. The advocacy for stimulating consumption often falls into circular reasoning: to increase economic growth, consumption needs to be expanded; to expand consumption, economic growth needs to be increased. Where should we start?

Q: Is the proportion of disposable income of Chinese residents in GDP too low, and should we promote resident consumption by increasing this proportion?

Richard Yu: Consumption is a function of residents' income, income expectations, and wealth or permanent income, and increasing residents' disposable income should help increase consumption. "The proportion of disposable income of Chinese residents in GDP is too low" seems to be another consensus in academia. What is the reality? From official statistics, we can see that in 2022, the proportion of disposable income of Chinese residents to GDP was about 43%, while in other countries it is generally above 60%. However, few people notice that the National Bureau of Statistics publishes two sets of data on disposable income: one based on household surveys and the other based on the flow of funds.

In 2022, based on the flow of funds calculation, the disposable income of the household sector accounted for 59.3% of GDP, which is a significant difference of 16.3 percentage points from the household survey. Which number should we believe? The household survey data requires filling out questionnaires, the subsidy amounts are limited, and low-income groups are more willing to participate. In addition, some residents may have a tendency to "underreport" when filling out the forms. The statistics on disposable income based on household surveys may have systematic biases.

Compared to other countries, in 2022, Japan's disposable income accounted for 56.22% of GDP, and Denmark was 46.1%, both lower than China's 59.3% calculated based on the flow of funds The UK is at 61.47%, slightly higher than China. Although the disposable income level of Chinese residents may indeed be relatively low, it is not as severely low as some viewpoints suggest.

Q: Do you still maintain your stance on the government heavily investing in infrastructure? Many economists point out that China's infrastructure investment is nearing saturation, investment efficiency is low, and the cost-effectiveness of fiscal spending is not high.

Yu Yongding: In China's specific institutional environment, infrastructure investment is a policy variable that macroeconomic regulators can directly control. Considering geopolitical factors, national security, and the effectiveness of macroeconomic stimulus policies, I still advocate for further increasing infrastructure investment. In the case of insufficient effective demand, compared to other stimulus measures, such as issuing consumption vouchers, infrastructure investment can have an immediate stimulating effect on economic growth. An additional 100 million yuan in infrastructure investment will immediately generate 100 million yuan in revenue, which will be transformed into new investment and consumption expenditures. This 100 million yuan in revenue will create more income through the multiplier effect.

Infrastructure investment is not only an effective means of stimulating economic growth but also a type of industrial policy that complements market mechanisms. The government may not have known in advance that artificial intelligence would become the most important emerging industry, nor that electric vehicles would replace fuel vehicles as the mainstream in the automotive industry, but the government understands the importance of power supply for economic development. Therefore, it has long insisted on investing in both new and old infrastructures such as thermal power, hydropower, nuclear power, wind and solar energy, ultra-high voltage, charging piles, and comprehensive energy. This large-scale investment in power infrastructure has laid a solid foundation for the development of China's manufacturing industry—regardless of the form this development takes—that is difficult for other countries to match.

The primary argument against using infrastructure investment to stimulate the economy is that China's infrastructure investment has already reached saturation. This viewpoint is debatable. There are numerous investment projects in the "dual circulation" and "new infrastructure" fields. For example, linking the western development strategy with the construction of the Central Asia Economic Corridor is significant for stimulating domestic demand and enhancing China's domestic security and geopolitical status.

The CF40 research team estimates that there is still about 31 trillion yuan of incremental public investment space in China over the next five years. Reports also indicate that the infrastructure investment needed for urban underground drainage systems alone amounts to 4.5 trillion yuan. Many studies point out that there is still considerable room for infrastructure investment in energy, electricity, and communications in China. On July 19, Premier Li Qiang announced the official commencement of the Yarlung Tsangpo River downstream hydropower project, with a total investment of about 1.2 trillion yuan. This is good news worth celebrating.

Infrastructure investment can also be fully integrated with policies to "promote consumption." Potential areas for infrastructure investment include: infrastructure that meets future consumption needs, such as people-centered new urbanization construction, various types of nursing home construction, training and salary subsidies for professional caregivers, hospital construction, and childcare facilities. This future-oriented investment not only helps to address the current shortfall in total demand but also increases the proportion of service consumption; it can increase current employment and also boost future employment (by raising the proportion of labor-intensive industries). The recent proposal for "urban renewal" by the central government has opened up an important new area for infrastructure investment The second major reason against using infrastructure investment to stimulate the economy is that infrastructure investment is inefficient and wasteful. The characteristics of infrastructure projects are "fundamental, public welfare, and long-term." Given this, it is unreasonable to expect public investment projects to achieve commercial returns in the short term. For example, high-speed rail, according to the financial report data from China National Railway Group, suffered significant losses before 2023, but the construction of the high-speed rail network has transformed the entire economy and social life in China, making its social benefits difficult to quantify.

China's infrastructure investment and construction capabilities are a systemic advantage, and it is precisely during periods of insufficient total demand that this advantage should be maximized. Once the economy fully recovers and grows autonomously, government-led infrastructure investment can gradually withdraw.

In past infrastructure investments, there have indeed been serious issues of waste and redundant construction. In December 2024, the State Council issued a list of prohibited projects for local government special bonds, which is very necessary. Large-scale infrastructure investment projects may even breed corruption. However, these issues can be resolved through legal and political means, and we should not throw the baby out with the bathwater.

Author of this article: Zou Biying, Source: Caijing Magazine, Original title: "Yu Yongding: How to Boost Consumption?"

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