One of China’s leading economists has outlined a range of measures to increase domestic demand by boosting household consumption and raising levels of investment by Chinese private enterprise.
Subsidies for household consumption
In an interview with the China Financial 40 Forum (CF40), Liu Chunyuan (刘元春), head of the Shanghai University of Finance and Economics, (SUFE), said efforts to revive Chinese consumption in the wake of the Covid-pandemic would necessitate increases to household income levels.
“The recovery of consumption must be built on the basis of income growth, and the expansion of consumption must be based on a significant improvement to household balance sheets,” Liu said.
Liu called for raising subsidies for low and middle-income groups, who are still feeling the impacts of the Covid pandemic. The SUFE head called for an especial focus on home refurbishments and durable goods such as vehicles.
“Support for household consumption can be increased, especially for their home refurbishment needs.
“At present, Chinese households are about to enter a second round of the home refurbishment and replacement cycle – a cycle of 12 years, the first of which started in 1998 with China’s housing reforms. Refurbishment subsidies could bring about significant improvements to consumption in 2023.
“It is also necessary to further evaluate and study the policy for the promotion of durable goods consumption, such as for automobiles.”
New ideas needed to step up private investment
Liu also pointed to the need to raise levels of investment from China’s private enterprises to boost the country’s aggregate domestic demand in 2023.
“Currently, a large number of expansionary policies are mainly focused on government-led projects and investments. The main implementers of these projects and investments are state-owned enterprises, with a strong lag in transmission to private enterprises,” Liu said.
“New ideas are needed to strengthen macro policies to support private enterprises. When it comes to policy, the simple approach in the past of ‘digging pits in finance and releasing water in currency’ needs to be changed.”
Liu said the innovative measures should include more direct support for spurring the growth of private investment, focusing in particular on the financing costs of enterprises.
Such measures include:
- 1. Further strengthening tax and fee reductions for small and medium-sized enterprises. “The State Council has already made it clear that it will continue to implement certain phased preferential tax and fee policies, such as the policy of reducing part of the individual income tax for small and micro enterprises and self-employed individuals with an annual taxable income of up to RMB 1 million, and the policy of reducing unemployment and work-related injury insurance rates, which will be implemented until the end of 2024.”
- 2. Specialized policies to promote the recovery of contact-intensive service sectors. “The service sector is a labor-intensive industry, and is particularly important for stabilizing employment. At present, certain necessary service activities have resumed, but the recovery of some parts of the services sector, such as those related to entertainment needs, needs to be further strengthened. This may require special start-up funds from the government to provide support.”
- 3. Targeted support policies should be put in place for the financing of small and medium-sized private enterprises. “At present, the financing costs of state-owned enterprises are relatively low, leading to interest rate arbitrage by certain state-owned enterprises, which is not conducive to the recovery of private enterprises.”
- 4. The recent turnaround in the expectations of private enterprises needs to be further consolidated. “Various measures should be provided to facilitate the repair of the balance sheet of private enterprises and their strategic layout. In this regard, further measures can be taken in areas such as green investment projects and the optimization of institutional systems.”
Liu further points out that China’s current fiscal stimulus remains constrained by the debt problems of local governments, which vary greatly on the basis of region.
“Although everyone’s enthusiasm is high, certain regions are constrained by historical [debt] burdens,” Liu said. “”There are many plans, but the actual results may not be sufficient.
“This requires us to have a high strategic understanding of local government debt problems and to consider whether a new round of ‘new-old differentiation,’ as in 2014, is necessary, and whether further financial transfer efforts are needed to support local grassroots operations.”