By Marius Zaharia
HONG KONG, March 3 (Reuters) – For more than a decade China pledged to make the consumer sector a more prominent driver of economic growth but has struggled to achieve this goal.
Analysts say potential costs in the trillions of dollars and risks that reform could bring instability are making officials wary of bold policy decisions.
Below are policy options for Beijing and some of the trade-offs involved:
WELFARE
The fastest way would be to significantly raise pensions, state sector wages, unemployment benefits and other perks.
An International Monetary Fund paper said doubling social spending in rural areas can increase consumption by 2.4 percentage points of GDP over the next five years.
In the short term this could be funded through debt issuance, but longer-term fiscal space would need to be created through tax, land and other reforms.
SERVICES
China has signalled it wants to invest more in services, such as sports, concerts, travel or elderly care. This is meant to create jobs and broaden spending opportunities, though analysts warn of risks of wasteful investment if incomes don’t rise faster.
TAX SYSTEM
Chinese leaders flagged plans for fiscal reforms in December 2023, but details are scarce.
The difference between how capital and labour are taxed encourages low wages and high investment.
China taxes capital gains at 20%, lower than most major economies and subject to many exemptions. The standard corporate income tax is 25%, but strategic industries have preferential rates.
On paper, businesses face a higher burden after China’s top court last year said it was illegal to avoid paying social insurance contributions, but implementation of the ruling has so far been patchy.
Taxing households more is a difficult proposition as China’s upper personal income tax band is among the world’s steepest, at 45%.
Funding social spending would be difficult without raising taxes on capital or businesses, but this could hurt exporters’ competitiveness and cause near-term disruption through bankruptcies and job losses.
In recent years, policymakers floated an idea to shift the burden of its consumption tax to wholesalers and retailers from producers and importers, who currently pay it.
The proceeds would mostly flow to local governments, rather than the central government, thereby shifting incentives for local officials to support consumption instead of the industrial sector.
URBANISATION
Beijing has also pledged to further liberalise a Mao-era internal passport system that officially divides the population into urban and rural.
About 300 million rural migrant workers live in cities but have limited access to urban healthcare, education and other social benefits. As a result, migrant workers save twice as much as their urban peers as a share of their income, economists estimate.
The IMF estimates that granting urban status to 200 million rural migrants could raise consumption by another 0.6 percentage points of GDP.
But equalising access also demands greater government benefits and investment in schools and hospitals.
PROPERTY MARKET
Plunging property prices since 2021 have made households less wealthy and more reluctant to spend.
Many analysts see government intervention to stabilise the market as key for revitalising the economy. Beijing, reluctant to prop up an overly supplied housing sector, has been supporting the stock market instead.
LAND REFORMS
China’s urban land is state-owned and a primary source of revenue for indebted local governments that lease it at a cost – a root cause for the overexpansion of the property sector.
Rural land is collectively owned by villages. Authorities sometimes expropriate rural land, primarily for industrial use, intermediating a transfer of resources from households to manufacturing.
Giving private entities full property rights and allowing market-driven transactions could ease industrial and residential overcapacity and improve household wealth, economists say.
CHILD SUBSIDIES
Demographers say the number of children in any economy directly correlates with domestic consumption.
Beijing is looking at a total potential cost of around 180 billion yuan ($25.8 billion) in 2026 to boost births, but many population experts say more may be needed.
STATE-OWNED ENTERPRISES
Total assets of non-financial state-owned firms (SOEs) reached 401.7 trillion yuan in 2024, the latest data showed. Some economists say these assets could be monetised to fund consumer reforms.
Critics say SOEs absorb ample capital from government transfers and through the state-dominated banking sector or debt issuance. Their return on assets is low and they hardly transfer profits back through dividends or other payments.
But they are also central to China’s industrial policies and infrastructure investment – factors that help Beijing meet its ambitious annual growth targets.
STRONGER YUAN
A stronger currency acts in the same way as a transfer of resources from exporters to importers, the consumer sector playing a big role in the latter.
But this also implies a painful trade-off of reducing Chinese firms’ competitiveness in external markets, potentially causing closures and layoffs in the near term.
(Editing by Shri Navaratnam)
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