Analysis: Painful Policy Choices Loom After China’s ‘Monumental’ Consumer Stimulus Plan

China’s Shift in Economic Stimulus: A New Approach Towards Consumer Spending

BEIJING/HONG KONG – China’s recent stimulus initiatives aimed at boosting consumer spending in order to achieve its 2024 growth target represent a significant departure from decades of traditional economic strategies. However, transitioning to a model where household demand serves as a sustainable driver of growth rather than investment is a challenging endeavor filled with difficult decisions.

Recent reports indicate that Beijing plans to issue around 2 trillion yuan (approximately $284 billion) in sovereign bonds this year, partly to subsidize consumer goods purchases and provide child support, thereby channeling additional funds to households.

This marks a notable shift towards enhancing consumption, a move that many economists have advocated for over the past decade. They have warned that without such changes, China could face a long-term period of subdued growth reminiscent of Japan’s stagnation in the 1990s.

"It’s a monumental shift – a landmark moment where the policy orientation has changed," remarked Tianchen Xu, an economist at the Economist Intelligence Unit.

The challenge stems from a growth model established in the 1980s, which many economists believe has depended too heavily on investments in property, infrastructure, and industry, while sidelining consumer needs. Critics point out that this investment-driven approach has led to overcapacity in infrastructure and manufacturing, resulting in a significant, unsustainable debt accumulation since the global financial crisis, as returns on investment have diminished.

While the current consumer-focused initiatives may be sufficient to lift China’s 2024 growth rate back to around 5%—particularly after recent disappointing economic data—analysts caution that these efforts alone are unlikely to alter the long-term economic trajectory.

Currently, household spending constitutes less than 40% of China’s annual economic output, considerably lower than the global average by about 20 percentage points. Conversely, investment in the country exceeds the global average by 20 points.

Bridging this gap will not happen quickly. For illustrative purposes, it took Japan 17 years to increase the share of consumption in its economic output by 10 percentage points following its 1991 low, according to Michael Pettis, a senior fellow at Carnegie China.

The recent fiscal initiatives "are not indicative of a genuine structural rebalancing," Pettis argued. "Achieving real rebalancing necessitates a fundamental change in the economic model that would reverse decades of practices where households have essentially subsidized investment activities."

Structural Challenges

The existing socioeconomic framework is designed to support investment rather than consumption. For years, households have faced low deposit interest rates, inadequate labor rights, and weak land rights for farmers, all contributing to meager incomes and a fragile social safety net.

The tax structure encourages high levels of investment while maintaining low wage levels. Capital gains are taxed at 20% in China—lower than the rates in both India and the United States—while upper personal income tax brackets reach up to 45%, among the highest in the world. Additionally, businesses, particularly in key industries, frequently benefit from tax exemptions and incentives from both central and local governments. This support for strategic sectors, termed "new productive forces" by the government, includes industries such as electric vehicles and green energy, which are deemed essential for national security.

Reforming the policy landscape to prioritize consumer empowerment would necessitate a broad and coordinated effort from authorities over several years, experts express.

However, this transition is laden with risks. Juan Orts, a China economist at Fathom Consulting, notes, "The right approach to shifting the economy towards consumption would involve ceasing to subsidize manufacturing with household funds." He cautions that this could result in a smaller manufacturing sector, leading to a steep decline in investment and potentially triggering a recession. Orts anticipates that China is more likely to experience a protracted period of adjustment, leading to what some have termed "Japanification."

To support this year’s fiscal strategies, Beijing is expected to increase debt issuance rather than reform the distribution mechanisms for income among businesses, the government, and households.

According to Pettis, the central government can likely sustain fiscal transfers for a few more years. However, he warns that without a transformation of the growth model, existing imbalances will persist. This could leave China facing similar challenges in the future, likely without a robust central government balance sheet to mitigate potential disruptions.