Xun Yugen: The Role of the Stock Market in Promoting Consumption and Suggestions

On November 7th, Xun Yugen (currently the Chief Economist of GuoXin Securities, Director of the Economic Research Institute, and concurrently the Director of the Postdoctoral Workstation Office) published a report titled "The Role and Suggestions of the Stock Market in Promoting Consumption." He pointed out:

1. The level of household consumption in China is lower than that of major economies, which does not match the stage of economic development. This is related to slow growth in household income and the need for improvement in social security.
2. The proportion of property income among Chinese residents is low. Increasing stock market returns is beneficial for raising household income and income expectations, thereby promoting consumption.
3. It is suggested to reduce stock market volatility and enhance residents' sense of investment gains; through institutional design, help residents increase their equity allocation ratio and share in equity market returns.

Main Text: The Role and Suggestions of the Stock Market in Promoting Consumption

This year, China has shown a phenomenon of a hot stock market and a cold economy. The Shanghai Composite Index has broken through 4,000 points, reaching a ten-year high, making it the best-performing year in the past five years. However, economic data remains relatively weak, especially with internal demand being sluggish. From January to September, the total retail sales of consumer goods increased by 4.5% year-on-year.

Currently, insufficient effective demand remains a prominent contradiction hindering China's economic development. The recently concluded Fourth Plenary Session proposed in the "14th Five-Year Plan Suggestions" that "the household consumption rate should be significantly increased, and the role of internal demand in driving economic growth should continue to strengthen," which is a major goal for China's economic and social development in the next five years.

As a key node connecting the conclusion of the "14th Five-Year Plan" and the long-term goals for 2035, expanding internal demand and promoting consumption in all aspects during the "15th Five-Year Plan" period is not only a ballast stone to cope with the complex external environment but also the strategic core for building a new development pattern and promoting high-quality economic development.

In recent years, there has been a broad consensus on the role of the stock market in promoting economic transformation and industrial upgrading, especially after the establishment of the STAR Market, which has become a long-term strategy to support technology innovation enterprises in listing and financing. In the face of the challenge of boosting internal demand, the stock market, as a reservoir of household wealth, can also play a more positive role in increasing household income and promoting consumption. This article discusses this.

The Root Cause of Low Consumption Rate in China

The household consumption rate in China is significantly low. Since 2000, the household consumption rate (household consumption expenditure/GDP) in China has shown a trend of first declining and then rising, currently approaching 40%. From 2000 to 2010, under the investment-driven economic growth model, China's economic structure exhibited characteristics of "heavy investment, light consumption," leading to a continuous decline in the household consumption rate. After 2010, the adjustment of China's economic structure began, and the household consumption rate overall rebounded, but it slightly declined from 2020 to 2022 due to the impact of the pandemic.

In international horizontal comparisons, China's household consumption rate is lower than that of major economies. According to World Bank data, in 2024, China's household consumption rate is not only lower than that of developed countries such as the United States (household consumption rate of 67.9%, same below), Germany (49.9%), and Japan (55.5%), as well as culturally similar East Asian countries like South Korea (48.9%), but also lower than developing countries like Vietnam (54.3%) and India (61.5%) Historical vertical analysis shows that the level of household consumption in China does not match the stage of economic development. In most economies, after reaching a certain stage, consumption becomes the main driving force of economic growth, meaning that household consumption rates are related to the stage of economic development. Currently, China's per capita GDP is approximately $13,000. When the per capita GDP of the United States, Japan, and Germany was at this level, their household consumption rates were between 50-60%, significantly higher than China's 39.9%.

There are many factors contributing to the low household consumption rate, such as slow growth in household income and a small social security scale. Consumption is a function of income, and the low property income of Chinese residents is one of the important factors affecting the household consumption rate. The main source of income for Chinese residents is wage income, and although the proportion of property income has been increasing year by year, it was only 8.3% in 2024, far lower than the 56.5% of wage income, and also lower than the 20% share of property income in personal income for American residents.

Moreover, the structure of property income for Chinese residents is imbalanced, with interest income accounting for 77.4% and dividend income only 10.8%, while dividend income accounts for 39.5% of property income for American residents.

The social security system is not well-established, and high expenditures on housing, retirement, and childcare also constrain household consumption rates. Consumption and savings are two sides of the same coin. According to IMF data, in 2024, China's household savings rate is 43%, far exceeding the EU's 25.1% and the US's 17.3%, and also higher than Asia's 39.0%.

Currently, China has established the largest social security system in the world, but the quality needs improvement. Issues such as significant gaps in pension between urban and rural residents and a lack of social security coverage for flexible employment are prominent, leading residents to save for housing, retirement, and high childcare expenses.

First, China's housing price-to-income ratio ranks among the highest in the world. According to Numbeo data, in 2024, China's housing price-to-income ratio is 28.5, far higher than Japan's 12.2, Germany's 8.9, and the United States' 3.3.

Second, the cost of raising children in China is also among the highest globally. According to estimates from the Yuwang Population Research Institute, the cost of raising a child to the age of 18 in China, relative to per capita GDP, is 6.9 times, second only to South Korea's 7.8 times, while the US, Japan, and Germany are around 4 times.

Third, there is significant pressure on residents to save for retirement. In 2023, the asset scale of China's first pillar/second pillar/third pillar pension systems was 15 trillion/8 trillion/0.01 trillion USD (converted at the average exchange rate for 2023), accounting for 8%/4%/0.04% of GDP, with a total share of 12.04%, while in the US, it was 28 trillion/22 trillion/15.9 trillion USD, accounting for 10%/79%/57% of GDP, with a total share of 146%.

The Role of the Stock Market in Promoting Consumption

Consumption is a function of income, and one reason for the low consumption rate among residents in our country is the low level of property income.

In March of this year, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued the "Special Action Plan to Boost Consumption," specifically pointing out the need to "broaden channels for property income" and to "stabilize the stock market through multiple measures" as a concrete approach. The stock market, as a reservoir of wealth for residents, can play a more active role in increasing residents' income, boosting income expectations, and promoting consumption.

Increasing the stock market return rate is beneficial for raising residents' income and promoting consumption. According to the calculations in "An Initial Exploration of the Relationship Between Property Income and Resident Consumption (Zhang Junwei)," an increase of 1 unit in property income will lead to an approximate increase of 0.51 units in future urban residents' consumption expenditure over three years.

In the United States, the proportion of equity in residents' asset allocation is high, and the share of property income in residents' income is also high, resulting in a high consumption rate. Since 1980, a series of policies encouraging the development of the capital market in the United States have been introduced, including reducing capital gains tax, encouraging pension funds to enter the market, and vigorously developing equity financing to nurture emerging industries. These policies have driven the asset allocation of American residents towards the stock market, leading to a long bull market in U.S. stocks and a continuous increase in residents' property income.

The proportion of equity assets such as stocks and funds in the asset allocation of American residents has risen from 22.3% in 1984 to 36.9% in 2024, while the share of dividend income in residents' property income has increased from 12% to 39.5%. As the property income of American residents has risen, their consumption rate has also gradually increased, from 61% in 1980 to 68% in 2024.

Increasing the stock market return rate is beneficial for raising residents' income expectations and promoting consumption. Resident consumption depends not only on income but also on income expectations. In the context of unstable income expectations, consumers will reduce their consumption expenditure and increase precautionary savings From a long-term perspective, the stock market has high returns, and residents' allocation of long-term funds to equities can boost income expectations. According to data from the book "The Long-Term Secret of the Stock Market," the annualized return of the U.S. stock market from 1802 to 2021 was 8.4%, higher than the long-term government bond yield of 5.0%. The high allocation of stocks by American residents allows them to enjoy high returns from the stock market, positively impacting their income expectations and consumption.

In 1974 and 1978, the United States successively introduced Individual Retirement Accounts (IRAs) and the 401K plan. Private pensions represented by IRAs and 401K have become the main source of funds for U.S. mutual funds and capital markets, promoting a shift in residents' asset allocation towards the stock market.

After 1980, against the backdrop of industrial restructuring and upgrading in the U.S. and a shift in residents' asset allocation towards equities, the U.S. stock market entered a long bull market, which facilitated the growth of residents' income expectations and consumption.

Looking at the long term, the long-term return rate of the A-share market is also quite impressive. From 2005 to 2024, the annualized return (including dividends) of the Wind All A Index was 9.8%, higher than the long-term government bond yield of 4.1%.

Historically, during bull market phases, the growth rate of residents' consumption is higher. The rule that rising stock markets benefit consumption also exists in our country. Based on the annual trends of A-shares from 2005 to 2024, market conditions can be classified into unilateral rises, unilateral declines, and range fluctuations, corresponding to bull markets, bear markets, and sideways markets, respectively. It can be observed that in bull market years, the average growth rates of residents' consumption expenditure and retail sales year-on-year were 12.3% and 13.3%, respectively, higher than the 10.3% and 10.9% in bear market years.

Suggestions for Better Utilizing the Stock Market to Promote Consumption

The "14th Five-Year Plan Suggestions" propose adhering to the strategic foundation of expanding domestic demand and vigorously boosting consumption. As mentioned above, the stock market can play a positive role in increasing residents' income and promoting consumption. The long-term returns of the A-share market are not low, but due to residents' low allocation to equities and the high volatility of A-shares, policy support is needed to attract long-term funds, promote stable development of the stock market, and provide better assistance for expanding domestic demand and promoting consumption.

Suggestion 1: Reduce stock market volatility and enhance residents' investment sense of gain.

Historically, the volatility of A-shares has been much higher than that of U.S. stocks. Since 2002, the average annual volatility of the CSI 300 Index has been 64%, while the average annual volatility of the S&P 500 during the same period has been 31%. From the perspective of bull and bear cycles, the annualized gains of A-shares during bull markets are significantly higher than those of U.S. stocks, while the declines during bear markets are also deeper.

Due to the high volatility of A-shares, there are relatively few investors who can truly enjoy stock market returns. In the future, it is necessary to strengthen dividends and buybacks, improve price discovery and risk management tools in the stock market, reduce market volatility, and enhance residents' sense of gain from investments

It is recommended to classify and implement measures to further improve the incentive and constraint mechanism for dividends of listed companies, balancing sustainable development of enterprises and the return needs of investors. In recent years, policies such as the "New National Nine Articles" have encouraged and supported listed companies to distribute dividends, and the dividend distribution in A-shares has significantly increased, with the cash dividend of the CSI 300 index rising from 33.7% of net profit in 2018 to 40.2% in 2024.

However, the dividend distribution in A-shares is concentrated in a single industry, primarily in finance and energy. In 2024, the proportion of dividends from the finance and energy sectors in the CSI 300 is nearly 60%; in contrast, the industry structure of dividends in the S&P 500 is relatively balanced, with finance and energy accounting for 24%, while daily consumer, discretionary consumer, and pharmaceutical sectors account for 31%.

For companies that are maturing and have stable financial conditions, it is suggested to improve the accountability mechanism for dividend commitments, strengthen the supervision of listed companies' dividend policies, and promote an increase in the scale and frequency of dividends. For companies still in the growth phase, it is encouraged to allocate more profits to establish competitive advantages and leave room for innovation.

It is recommended to encourage A-shares to increase share buybacks to enhance the investment value of listed companies. Drawing from the U.S. stock market, buybacks are an important means for listed companies to stabilize stock prices, improve EPS, and enhance shareholder returns. From 2018 to 2024, the average proportion of buybacks to net profit in the S&P 500 was 60%, while during the same period, it was only 1.0% for the CSI 300.

A-shares need to further lower the threshold for buybacks and improve the buyback constraint mechanism to achieve a virtuous cycle of "healthy corporate development - enhanced investor perception - increased market attractiveness."

Utilize the role of the stock market as a price discovery and risk management tool to stabilize market fluctuations, such as stock index futures. Drawing from the experience of developed markets, stock index futures play an important role in improving the operational mechanism of the stock market, providing hedging tools, and promoting stable market development.

From the perspective of A-shares, stock index futures also serve as a "shock absorber" for stock prices. According to data from the China Securities Regulatory Commission, the listing of CSI 300 stock index futures significantly reduced stock market volatility by about 20%. In the future, it is necessary to further improve regulatory and rule systems to promote the healthy development of tools such as stock index futures and ensure stable operation of the stock market.

Recommendation 2: Help residents increase their equity allocation ratio through institutional design to share the returns of the equity market. The proportion of equity asset allocation among Chinese residents is very low, making it difficult for them to enjoy long-term returns from the stock market. In 2022, the proportion of housing assets in the total assets of Chinese residents was still as high as 47%, while equity assets such as stocks and funds accounted for only 9% of total assets, far below the 34% equity asset allocation ratio of American residents. Additionally, some retail investors have a strong short-term speculative sentiment, leading to the saying in the A-share market that "seven losses, two breakevens, and one profit."

According to the data from "Wealth Redistribution in Bubbles and Crashes (AN Li et al.)," during the A-share technology innovation bull market from 2014 to 2015, the bottom 85% of investors (with account amounts between 0-500,000 yuan) lost nearly 270 billion yuan, while the top 0.5% of ultra-high-net-worth investors (with account amounts over 10 million yuan) earned over 250 billion yuan, achieving a return rate of 33%.

In the long term, the A-share market offers considerable returns, but the strong short-term speculative sentiment among investors and the low allocation of equity assets for residents' retirement savings remain important factors restricting residents from enjoying long-term returns from the stock market and increasing property income. In the future, it is necessary to encourage through policies and institutional design to further enhance the equity allocation ratio of residents' long-term retirement savings, especially in the second and third pillars of pensions.

Regarding the second pillar, it is recommended to expand the coverage of enterprise annuities and optimize the supply of financial products.

On one hand, relax the conditions for establishing enterprise annuities, lower the entry threshold, and encourage small and medium-sized enterprises to establish annuity plans to increase the coverage rate of enterprise annuities. For example, a collective annuity system could be established, allowing enterprises in a specific region or industry to jointly initiate annuity plans, manage enterprise annuities centrally, and flexibly adapt to the development needs of small and medium-sized enterprises.

On the other hand, enrich the supply of financial products and design differentiated products based on the holder's age and risk preference. For instance, target date funds could be designed to automatically adjust the asset allocation ratio of stocks and bonds based on a preset retirement date or investment period, matching the risk preferences of long-term funds at different age stages and increasing the equity allocation ratio of annuities.

The equity allocation ratio of the second pillar in the United States is 49%, while in China it is only 10%. In the U.S. 401K plan, the equity allocation ratio varies by age group, with younger individuals having a higher proportion, as shown in Figure 23.

The scale of the third pillar is too small, and it is recommended to increase participation and equity allocation ratios through enhanced tax incentives and subsidies for low- and middle-income groups. Starting from March 2025, the personal income tax threshold in China will be raised to 7,000 yuan/month, making it difficult for some low-income groups to enjoy tax benefits from personal pensions and to form effective contribution incentives.

For low- and middle-income individuals who open accounts and contribute to pensions, it may be considered to provide direct fiscal matching subsidies based on their contribution amounts (for example, if an individual contributes 1,000 yuan, the government matches with a subsidy of 1,000 yuan), encouraging low- and middle-income groups to save for retirement and expanding the coverage of the third pillar For middle and high-income groups, the annual contribution limit for personal pensions of 12,000 yuan is relatively low, and the tax incentive policies are limited. It is suggested to dynamically adjust the pre-tax deduction limit for personal pensions based on factors such as residents' income growth and price levels to enhance residents' participation.

Author of this article: Xun Yugen, Source: Xun Yugen's Thoughts, Original title: "Xun Yugen | The Role and Suggestions of the Stock Market in Promoting Consumption"

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