Two Keys to Driving Domestic Demand: Enhancing Confidence and Targeting Priorities

April 18, 2023

About the author:

 

In the late 1990s, China grappled with significant economic and social challenges, both domestically and internationally. The nation was hit by devastating natural disasters and felt the impact of the Asian financial crisis. In response, the Chinese government launched a series of reforms aimed at stimulating domestic demand. These reforms were centered around the industrialization of education, the commercialization of healthcare, and the monetization or commodification of housing. Since education, healthcare and housing had long been considered the three main burdens on the Chinese population, the implementation of these reforms was met with widespread interest and concern. Many worried that such sudden changes could lead to social instability. In reality, the reforms in education and healthcare have undergone reversals and zigzags over the past 25 years, and ultimately the public roles of the two sectors were reiterated. The real estate market, however, has experienced rapid development and emerged as one of the primary contributors to China’s sustained and high-speed economic growth.

 

The year 2023 holds great significance for China. It is the first year of implementing the guidelines of the 20^th National Congress of the Communist Party of China (CPC), and the first year of eased COVID-19 restrictions following a three-year pandemic fight. It also marks the halfway point of the 14^th Five-Year Plan for national economic and social development, and the 10^th anniversary of China’s “Belt and Road” initiative. However, the current economic and social landscape in China remains severe, arguably more challenging than it was 25 years ago. The report of the 20^th National Congress of the CPC employs the metaphor of “high winds, choppy waters and even dangerous storms” to describe the potential risks ahead. Therefore, the Report on the Work of the Government, delivered by Premier Li Keqiang at the opening meeting of the first session of the 14^th National People’s Congress in Beijing on March 5, emphasizes “expanding domestic demand” as the foremost of the eight recommended tasks for the government in 2023. Here I offer some personal analyses and perspectives on how to effectively stimulate domestic demand.

 

 

I. The bleak global economic outlook renders it unrealistic to place high hopes on external demand

Ever since the United States started its trade war against China in early 2018, frictions between the world’s two largest economies have been extended from economic and trade domains to military, technology, information, diplomacy, and other areas. Bilateral relations have yet to see substantial improvement, and the risk of decoupling is on the rise. Major global supply chains and industrial chains have suffered severe disruptions and are undergoing a period of relocation and restructuring due to factors such as the COVID-19 pandemic and deeper geopolitical conflicts. This has resulted in factory closures, worker layoffs, and sluggish consumption. The Russia-Ukraine conflict in the spring of 2022 triggered a sharp increase in global food and energy prices, resulting in severe inflation in nearly every country. To combat inflation, the U.S. continued to raise interest rates, prompting a global capital influx back to the U.S. Many other countries followed suit with tightening policies. Therefore, the world economy is likely to endure a prolonged period of recession. In the short term, it is not viable for China to rely on exports to sustain high-quality economic growth. According to the data released by the General Administration of Customs of China, China’s imports and exports in the first two months of 2023 totaled USD 895.72 billion, down 8.3%. Specifically, exports totaled at USD 506.3 billion, down 6.8%, and imports were at USD 389.42 billion, down 10.2%.

 

 

II. Boosting confidence is urgently needed to drive domestic demand

Now that we cannot rely on foreign demand to boost the economy, our priority should be to expand domestic demand and foster a new development dynamic centered on domestic consumption, while remaining open to international engagement. However, domestic demand remains weak. The monthly data released by the National Bureau of Statistics indicate that China’s total social consumer goods retail sales for October, November, and December 2022 were RMB 4.02 trillion yuan, 3.86 trillion yuan, and 4.05 trillion yuan respectively, representing a year-on-year decline of 0.5, 5.9 and 1.8 percentage points. Increasing the income of urban and rural residents through various channels can certainly help revitalize and expand domestic demand, but the impact of such measures may be limited. The primary cause of weak domestic consumption is a lack of confidence rather than insufficient income. According to the Statistical Communiqué of the People’s Republic of China on the 2022 National Economic and Social Development, the income and savings of domestic residents increased, while consumption decreased. The per capita disposable income of residents for the whole year was RMB 36,800 yuan, representing a nominal increase of 5% from the previous year and a real increase of 2.9% after adjusting for inflation. The total balance of deposits in all currencies held by financial institutions at the end of the year stood at RMB 264.4 trillion yuan, an increase of RMB 25.9 trillion yuan from the beginning of the year. RMB deposits rose by RMB 26.3 trillion yuan to RMB 258.5 trillion yuan. The per capita expenditure of residents for the whole year was RMB 24,500 yuan, representing a nominal increase of 1.8% from the previous year but a real decrease of 0.2% after adjusting for inflation. In the past two years, Chinese residents showed a marked interest in acquiring large-denomination certificates of deposit from major domestic banks. Such deposit products typically offer a three-year term with an interest rate of around 3%, and are often in short supply as people compete to buy them. Three possible reasons may explain this phenomenon. Firstly, residents may have enough money but lack confidence in the economy, so they choose to save for a rainy day rather than spend the money. Secondly, they might not have suitable investment channels or options. The property market has been in a downturn, and bearish performance persisted in the Shanghai and Shenzhen stock markets, with low trading volumes and turnover rates. Also, in major Chinese cities like Beijing, Shanghai, Guangzhou, and Shenzhen, the automobile market has become saturated, as evidenced by the high number of cars on the roads and the limited road infrastructure to support further growth. Thirdly, residents might be expecting that the loose monetary policy of the past few years would continue, with further cuts to bank interest rates to stimulate the economy. As a result, they opted to purchase large-denomination certificates of deposit with acceptable interest rates. Data from the People’s Bank of China reveals that RMB deposits grew by RMB 2.81 trillion yuan in February 2023, an increase of 270.5 billion yuan compared with the same period last year. Household deposits accounted for RMB 792.6 billion yuan.

 

Given the status quo, confidence is indeed more valuable than gold. Enhancing residents’ expectations and boosting their confidence are crucial to stimulating domestic demand. The first step should be to stabilize employment and restore residents’ confidence in the main breadwinners’ ability to retain their jobs. If this primary source of income is secured and their adult sons and daughters can find employment to support themselves, it means a steady stream of income and capital, allowing residents to confidently consume and even moderately overspend. On the other hand, if the economic situation worsens, with mass layoffs from big companies and young people struggling to find jobs, the consequences could be dire. The second step that ought to be taken is to safeguard people’s livelihoods and restore residents’ confidence in the country’s basic social safety net. Public security needs to be strengthened through a combination of commercial insurance, social intermediaries, family support, and personal efforts. However, in areas such as education, healthcare, and elderly care, providing basic safety nets for all residents can greatly alleviate people’s concerns and boost consumption. In recent years, China has made some efforts to reform its public social security system, such as implementing a nationwide basic pension insurance program for enterprise employees, and healthcare reforms that include reimbursement of cross-provincial medical expenses and the expanded use of personal medical insurance accounts to pay for the medical expenses of other family members.

 

 

III. Focusing on key demographic groups and areas

To drive domestic demand, it is not sufficient to focus solely on the aggregate demand level; the composition of demand must also be considered. One significant factor contributing to China’s sluggish domestic demand is the untapped and unmet consumption needs of many middle-class and wealthy individuals. According to the Yi Tsai · Hurun China Wealth Report 2022 released by the Hurun Research Institute, the number of high net-worth families in China with RMB 10 million yuan of total wealth increased by 2.5% or 50,000 households year-on-year to 2.11 million households in 2022. In economics, the law of Diminishing Marginal Propensity to Consume (DMPC) suggests that as income increases, the proportion of that additional income used for consumption decreases. Therefore, it is crucial to tap into the consumption potential of these groups by targeting specific demographics and implementing well-defined strategies. This may include promoting incremental changes in sectors such as high-end luxury goods, education, and healthcare, and exploring opportunities to develop high-end luxury markets (such as Beijing’s SKP), high-end education and training, and private medical services. One of my articles published in National Governance Weekly (Issue 1, 2023) also emphasizes the importance of addressing the consumption needs of two major demographic groups—digital natives and the elderly.

 

The government has charted a roadmap with numerous measures to boost domestic demand in critical areas. The Report on the Work of the Government delivered at the 2023 Two Sessions highlights the need to stabilize bulk consumption and revive the consumption of everyday services. The Ministry of Commerce has announced its guidelines in this regard to target the “four pillars” of consumption—automobiles, home appliances, home furnishings, and catering—and introduced policy measures accordingly to restore and expand consumption in these sectors. Additionally, I suggest we take advantage of the ongoing rural revitalization campaign to stimulate the rural consumption market. The State Council made it clear in its policies on “further unleashing the potential of consumer spending and promoting the sustained recovery of consumption” in 2022 the need to vigorously develop green consumption, tap into the consumption potential in counties and townships, promote the healthy and sustainable development of consumption platforms, and further consolidate the foundation for high-quality consumption development. Although the CPC Central Committee and the State Council, in their joint document issued in January 2023 on the priorities in the country’s rural revitalization drive, did not directly emphasize the need to stimulate the rural consumption market, they did include several measures that focus on agricultural infrastructure construction, agricultural technology and equipment, and rural development, which could potentially create significant consumption opportunities. However, it is important to recognize that the rural population is vast in number and geographically dispersed, making it challenging to unlock their consumption potential. To address this, steps should be taken to improve the rural commercial system, further develop the urban-rural public transportation system, extend the reach of express delivery services in rural areas, and enhance the enabling role of digital platforms, particularly e-commerce. In addition, it is essential to optimize the supply of goods and services available to rural consumers to ensure that their consumption needs are met.

 

 

 

 

 

 

 

 

 

 

Please note: The above contents only represent the views of the author, and do not necessarily represent the views or positions of Taihe Institute.

 

This article is from the March issue of TI Observer (TIO), which is a monthly publication devoted to bringing China and the rest of the world closer together by facilitating mutual understanding and promoting exchanges of views. If you are interested in knowing more about the October issue, please click here:

http://www.taiheinstitute.org/Content/2023/03-31/2124231553.html

 

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