■ Ma Haitao
The 2024 Government Work Report points out that "efforts should be made to expand domestic demand and promote the economy to achieve a virtuous cycle" and "better coordinate consumption and investment to enhance the role of economic growth". As the mainland's development enters a new stage, economic growth needs to rely more on consumption, and it is extremely crucial to form an economic growth model with coordinated development of consumption and investment. Therefore, this paper analyzes the reasons for the current lack of consumption based on the three trade-offs between savings and consumption, investment and consumption, and income distribution and consumption in the mainland. In the future, we should continue to deepen the reform of the income distribution system, fully release the consumption potential of residents, and stimulate new momentum for economic growth.
01 "Three Imbalances" That Lead to Insufficient Consumption
First, there is an imbalance between savings and consumption. At present, the mainland's economy is facing triple pressures, with residents' precautionary savings rising and consumption further squeezed. In recent years, the global economic downturn and market contraction caused by frequent public emergencies have led to a slowing economic growth and heightened uncertainty about the future, and the propensity of businesses and households to save precautionarily to cope with possible income shortfalls or unexpected expenses. In order to ensure a relatively stable standard of living in an uncertain economic environment, many households will choose to reduce their immediate consumption, increase their savings, or increase their investment in relatively safe financial products for precautionary reasons. At the same time, the proportion of enterprise savings and household savings in GDP is very high, and unlike that of enterprises and residents in most countries in the world, there is no negative correlation between enterprise savings and household savings, and the savings of mainland enterprises and residents are at a relatively high level. The reason for this is that the mainland's enterprise sector and the resident sector are relatively independent of each other. Generally speaking, when a company's savings increase, its assets will increase accordingly, and if residents hold equity in the enterprise, the increase in assets will increase the wealth of residents in the form of an increase in stock prices. Therefore, in foreign countries, household funds are often the main source of funds for enterprise equity financing, while in the mainland, the huge amount of state-owned capital is an important part of the socialist market economy system, and it is also an important part of helping enterprises to obtain equity financing, and the wealth effect generated by enterprise savings has little impact on residents' saving behavior. In other words, it is difficult for corporate savings to be converted into residents' wealth to be directly used by residents, and the savings of enterprises and the household sector are relatively independent of each other, and residents themselves need to accumulate a large amount of savings to cope with uncertain risks. To sum up, at present, the structural dilemma that it is difficult for enterprises and household sector assets to "communicate" with each other, as well as the increase in the motivation for precautionary savings, make the squeeze on consumption of savings particularly significant.
Second, there is an imbalance between investment and consumption. Investment has played an important role in the mainland's economic development, and through the expansion of the scale of production, it can promote employment and have a positive impact on the increase in the absolute level of consumption. Compared with developed countries, although the mainland's investment rate is relatively high, the final consumption rate and household consumption rate are both low. On the one hand, the reason for this is the investment preference brought about by institutional factors. Because local governments have performance appraisal and competitive pressure, and strengthening infrastructure construction and attracting investment have a direct positive impact on this, local governments have a tendency to attract investment by increasing public expenditure on infrastructure construction and reducing the price of industrial land. These actions have led to an increase in the return on investment in the jurisdiction, which has contributed to the increase in the investment rate. At the same time, the promotion of consumption by local governments is often neglected, and the urban land planning under this strategy often leads to restrictions on housing land, thus raising housing prices, making residents need to spend more disposable income on housing savings, reducing current consumption power, and increasing the imbalance between investment and consumption. On the other hand, there is a further imbalance in the proportion of investment and consumption caused by lower labor returns. As a developing country with a large population, although the birth rate has decreased in recent years and the demographic dividend has declined, the mainland is still a country with a relatively sufficient labor supply from a world perspective. Due to the relatively low remuneration of labor, the income distribution is more inclined to capital, and this distortion between capital and factors of production not only stimulates the investment of enterprises, but also the low remuneration of labor itself means that the disposable income of residents is insufficient and the consumption power is limited. The imbalance between investment and consumption on the mainland due to the above various reasons has further aggravated the dilemma of insufficient consumption.
Third, there is a slowdown in income growth and uneven distribution. On the one hand, the growth of household income has generally slowed down. With the smooth transition of epidemic prevention and control, the operation of all walks of life is back on track, and the national economy continues to recover, but the growth momentum of residents' income has yet to be substantially restored. China's GDP grew by 5.2% in 2023 from the previous year, but it is still lower than the 9.1% in 2021 and 8.9% in 2019. If we extrapolate linearly along the path of disposable income from 2013 to the first half of 2019, we can find that the growth of household income has indeed slowed down. This is related to multiple factors such as weak economic recovery momentum, sluggish real estate industry and foreign trade exports, and insufficient investment confidence of enterprises. Considering the close relationship between household consumption and household income, the slowdown in income growth will inevitably constrain the expansion of household consumption. On the other hand, the problem of uneven income distribution still exists, and it is difficult to support large-scale consumption demand.
There is room for optimization in the current system of transfer payments and direct tax redistribution, for example, there is a lack of a strong adjustment mechanism for property income, and the effectiveness of redistribution policies in rural areas is low. Judging from the current situation, although the income inequality in the mainland has eased in recent years, the Gini coefficient of the mainland will still be 0.47 in 2023, exceeding the international warning line of 0.4. Low- and middle-income groups are more likely to spend their limited income on basic needs and precautionary savings due to slow income growth. Although the high-income group has strong consumption power, its consumption growth rate is not enough to offset the impact of insufficient consumption of the low- and middle-income groups.
02Deepen the reform of the income distribution system and release the consumption potential of residents
First, improve the social security system, control the level of precautionary savings, and boost residents' confidence in consumption. The government should make full use of fiscal policy, effectively regulate fiscal revenue and expenditure, improve the social security system, improve the people's sense of social security, and reduce risk-related precautionary savings, so as to release more funds for consumption. The first is to strengthen the construction of the basic old-age insurance system. Population aging is one of the important issues facing society today. Strengthening the construction of the basic old-age insurance system, raising the level of basic pensions, extending the retirement age, and ensuring the basic living needs of the elderly will help reduce residents' precautionary savings. In addition, we should also actively promote the construction of multi-level old-age security systems such as enterprise annuities and individual commercial pension insurance, so as to provide residents with more comprehensive old-age security. The second is to improve the basic medical security system. The medical security system is an important institutional arrangement to ensure the health of the people, and the basic medical insurance system for urban and rural residents should be further improved, the coverage and reimbursement ratio of medical insurance should be increased, the cost of medical treatment should be reduced, and the preventive savings caused by illness should be reduced. At the same time, the government should increase investment in medical resources, improve the level of medical services, and reduce excessive savings due to insufficient medical resources. The third is to strengthen the construction of the unemployment insurance system. Unemployment insurance is an important means of protecting vulnerable groups in society, helping to reduce the economic pressure caused by emergencies and reducing residents' precautionary savings. It is necessary to strengthen the work of unemployment registration and information collection, increase the level and coverage of unemployment insurance benefits, strengthen reemployment training and assistance for the unemployed, and at the same time increase the intensity of assistance for low-income groups. Fourth, we should strengthen housing security and education security. Housing and education are important aspects of people's lives and one of the important reasons for residents to save precautionarily. It is necessary to strengthen the construction of the housing security system, increase the supply of low-rent housing and affordable housing, and reduce the housing burden. At the same time, we should increase investment in education, optimize the allocation of educational resources, improve the quality of education, and reduce excessive savings due to education expenditure.
Second, it is necessary to optimize the profit distribution model of the enterprise sector and the household sector, and improve residents' consumption expectations. First, it is necessary to strengthen the reform of the enterprise profit distribution system. Scientifically set up an employee performance evaluation mechanism to ensure fair and just profit distribution, set up a reward mechanism linked to enterprise performance, encourage employees to hold company shares, and motivate employees to create more value for the company. Improve the level of employee welfare, stimulate the enthusiasm and creativity of employees, and enhance employees' loyalty and satisfaction with the enterprise. Improve the internal management system of the enterprise, improve the operational efficiency and profit level of the enterprise, and fundamentally ensure the implementation of the profit distribution system. The second is to optimize the redistribution of wealth through the reform of the fiscal and taxation system. Adjust the individual income tax system, moderately increase the tax threshold of individual income tax, and reduce the tax pressure on low- and middle-income earners. Promote the reform of resource tax, reasonably establish the level of tax rate based on the differences in resource conditions in different regions, and avoid the structural burden of the unified tax rate on enterprises. Improve the transfer payment mechanism, and promote the gradual narrowing of the income gap between regions by adjusting the proportion of tax revenue division between the central and local governments and the standards of fiscal transfer payments. We should intensify supervision over tax collection and management, severely crack down on tax evasion and other illegal activities, ensure the fair collection and effective use of tax revenues, and maintain the credibility and stability of the tax system. The third is to accelerate the reform and innovation of the financial system and improve residents' consumption expectations. We will continue to promote the reform of the loan market prime rate, enhance the transmission efficiency of monetary policy, reduce social financing costs, further boost residents' confidence and stimulate consumer demand. Guide banks and insurance institutions to actively support the consumer market, standardize the launch of diversified consumer financial products and services, promote the cultivation of new consumption patterns for the consumption of bulk commodities such as new energy vehicles and green home appliances, and guide the flow of funds to hot consumption areas. Strengthen supervision of the use of consumer credit and the flow of funds, support the healthy development of consumer credit, give full play to the positive role of consumer credit in expanding consumption, and optimize the interest rate, repayment period, and credit line of small consumer credit and credit cards on the basis of improving the credit reporting system and taking into account the characteristics of the consumer industry.
Third, we should further promote supply-side structural reforms, raise residents' income levels, and enhance residents' spending power. The first is to encourage scientific and technological innovation and technological progress, and promote industrial transformation and upgrading with new quality productivity. We will increase support for high-tech industries and strategic emerging industries, promote the transformation of traditional industries into high value-added and high-efficiency industries, and improve the overall competitiveness of industries, so as to improve the profitability of enterprises and create conditions for increasing residents' incomes. Promote the development of the service industry, especially the high-end service industry and the modern service industry, including finance, information technology, cultural and creative fields, expand the proportion of the service industry, improve the quality of employment and income level of the service industry, and provide more employment and entrepreneurship opportunities for residents. Strengthen support for the rural economy, promote the upgrading of the rural industrial structure and the enhancement of the added value of agricultural products, develop modern agriculture and agriculture with special characteristics, raise the income level of farmers, and narrow the income gap between urban and rural areas. The second is to optimize the labor market and improve the education and training system. Improve the skill level and quality of workers, adapt them to the needs of new industries and new technologies, and improve the employability and income level of workers. Establish and improve the information disclosure and matching mechanism of the labor market, promote the effective connection between labor supply and demand, reduce structural unemployment, and improve the quality and stability of employment. Attach importance to the work of collective wage negotiation and the management of labor contracts, protect the legitimate rights and interests of workers, raise the level of wages, and increase residents' income. The third is to intensify the supply-side structural reform in the consumption sector. Improve the quality and variety of consumer goods, meet the diversified and personalized consumption needs of residents, promote consumption upgrading, and stimulate economic growth. Relax market access in the consumer sector, encourage private capital to enter the consumer sector, promote healthy competition, reduce the price of consumer goods, and increase the actual purchasing power of consumers.
The bright future of China's economy has its own internal logic. In the face of the current challenge of insufficient consumption, actively deepening the reform of the income distribution system, optimizing the social security system, and further promoting the supply-side structural reform are the only ways for the mainland to unleash the consumption potential of residents and promote stable economic growth, which will guide residents to increase consumption, smooth the domestic cycle, and inject new vitality into China's economic development.
(The author is President of the Central University of Finance and Economics and Deputy Secretary of the Party Committee)
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Chief Producer丨Wang Hui Che Haigang
Producer丨Li Piguang, Wang Yu, Liu Weimin
Editor-in-Chief丨Mao Jinghui Editor丨Zou Duo