Economist Lan Xiaohuan on the balancing act needed to boost China’s consumption
Lan Xiaohuan is a professor of economics at China Europe International Business School. His book, How China Works: An Introduction to China’s State-led Economic Development, has sold millions of copies in China and has been translated into multiple languages. Here, he discusses the economic realities behind China’s record trade surplus, the case for a stronger social safety net, and how public…
China economist Lan Xiaohuan delves into the complexities of boosting China's consumption and the necessary policy adjustments. He notes that the decline of China's real estate market and the rise of manufacturing and technology sectors are critical shifts domestically. Externally, the pandemic, the Russia-Ukraine war, energy shocks in Iran, and shifting political dynamics in the United States have significantly influenced China's economic landscape.
To address fiscal pressure, local governments can pursue fiscal reforms, such as relaxing special local government bond quotas and easing bank credit, which help refinance old debts with new ones to prevent defaults. However, long-term fiscal sustainability requires aligning expenditure with income. While tax reforms and spending cuts are essential, tax reforms should focus on making the distribution of the tax burden more reasonable, rather than solely aiming to increase local government revenue.
Boosting domestic demand and consumer spending requires a long-term strategy. While increasing wages is one approach, it is primarily driven by the private sector. The government can optimise the business environment to encourage wage hikes. For property and asset income, stabilising property values, improving financial asset performance, and unlocking rural land potential through asset revitalisation are crucial steps.
The government can directly contribute to this transition by strengthening social security and investing in education, healthcare, and pension security. Although China's savings rate is high, expanding public welfare spending can help reduce the savings rate and increase consumption. However, Lan Xiaohuan argues that public welfare spending should not be directly linked to consumption, as citizens should maintain a high savings rate even with a robust safety net.
The transition to raise consumption is a long-term process, and household consumption in China currently accounts for around 40% of GDP, significantly lower than the 70% in the United States. To further increase consumption, China must rebalance its economy and enhance domestic demand.
Written by urgent.news from South China Morning Post's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
