Economist calls on Beijing to shift from investment to boosting consumer spending
TENG Tai: "A high-level governmental report said it is necessary to stabilize consumption by promoting investment, but how could consumption be stabilized by promoting investment?"
A group of prominent Chinese economists called for the government to stimulate consumption instead of sticking to investment-led growth on November 19 at the CMF宏观经济热点问题研讨会（第57期）57th Seminar on Hot Topics in the Macroeconomy of the China Macroeconomic Forum (CMF).
The CMF is organized by the National Academy of Development and Strategy of Renmin University of China (RUC), the School of Economics of RUC, and the China Cheng Xin International Credit Rating Co. Ltd.
The theme of the 57th Seminar is 疫情下的中国消费：现状、成因及未来走势 Chinese consumption in the pandemic: current situation, causes, and future trends.
Pekingnology published one speech at the seminar
and hereby presents another one by 滕泰 Tai TENG, Head of the WANB Institute, where the official bio describes him as a guest lecturer at several top Chinese universities. He was the chief economist at China Galaxy Securities and Minsheng Securities, respectively, two domestic security brokerages.
The Change of Policy and Mindest and Stabilizing Consumption Remains Distant and Difficult
I. No consensus on stabilizing consumption
On whether stabilizing consumption is now the top priority, there is no consensus in academia and policy-making departments. And there is a long way to reach that consensus. Earlier this year, two well-known scholars whom I respect very much still proposed the need to expand investment several times in their articles, arguing that China should still be investment-driven for a long time and that stabilizing investment produces the fastest results, while consumption, as an endogenous variable, is something China doesn’t have an easy path to promote.
The emphasis on stabilizing investment has been embedded in academia and policy-making, and that deep influence has yet to be countered. After one or two years of discussions and appeals in academia, the understanding of (the importance of) stabilizing consumption has progressed compared to last year and the year before, but it is far from forming a consensus. But it is still very distant from becoming a consensus.
The central government departments, on the other hand, have a well-established mechanism for stabilizing investment at all departmental levels, with trillions of yuan of capital investment being made without any barriers in decision-making. All local decisions to stabilize economic growth revolve around infrastructure building and investment promotion, and there are basically no measures related to stabilizing consumption. Therefore, there is still a lot of work to be done to completely change the mindest in policy-making and to make academics, policy-making departments, and society aware of the great significance of stabilizing consumption against China's 20-year-long inertia of stabilizing investment through infrastructure construction. If this year's policy remains the same as last year and the year before, it will affect next year's growth stabilizing.
II. The importance of stabilizing consumption for stabilizing growth
Why is stabilizing consumption so important? Because the structure of growth has changed. Consumption normally contributes about 65% of GDP growth, so the proportional allocation of fiscal funds for stabilizing growth should also be in line with the economy's structure, with 65% of fiscal funds allocated to stabilizing consumption and the remaining 35% to stabilizing investment. In practice, however, the fiscal budget for stabilizing consumption is almost zero, which distorts the growth structure.
Consumption has now become a central factor in the structure of economic growth. The phase of rapid urbanization and industrialization of the past two decades has passed, and investment in infrastructure is already over-saturated. If further efforts are made to stabilize investment, the economic and social benefits generated at present will not be the same as they were ten or twenty years ago. Currently, China has passed the stage of infrastructure investment and building. Whether in Beijing, Shanghai, or the central and western parts of the country, there are enough buildings. If stabilizing growth still rests on stabilizing investment, the engine of China's economic growth will be seriously distorted, with very bad results. This is not yet widely recognized in society and therefore needs to be examined more intensively.
China’s previous strategy of stabilizing investment has seriously distorted the structure of fiscal spending. Last year, China's total GDP was 114 trillion yuan and the total fixed asset investment was 55 trillion yuan - with the proportion being 48%. Developed countries such as the United States, Europe, Australia, and Japan have a total investment in fixed assets of around 20% of national GDP each year. India, the representative country among developing countries, is lagging behind our country in terms of infrastructure, so the urgency of their infrastructure investment should be stronger than ours. But India's investment in fixed assets as a percentage of GDP is only 27%. The long-term distorted structure resulting from our high fixed asset investment to GDP is unsustainable. Some scholars argue that our investment only needs to grow by 5% yearly for the next ten years. But truly calculated on this basis, total fixed asset investment will reach 80-90 trillion yuan in 10 years, and we simply do not need that much infrastructure. Assuming that our total GDP investment is 150 trillion in ten years, based on a 20% return to a post-industrial or post-urbanization level in ten years, total fixed asset investment should be 30-40 trillion yuan. If this distorted economic structure is corrected over the next ten years and fixed asset investment falls from 55 trillion yuan to 30-40 trillion yuan, investment should grow negatively. Continuing to maintain high growth (in fixed assets) will undoubtedly crowd out consumption and create a very negative impact.
This negative impact is now manifesting itself. For example, last year, the difference between highway revenues and expenditures was more than RMB 800 billion. The national railway is also losing money, and 80% of the 2,000 特色小镇 characteristic towns are making serious losses. China has passed the stage of investment development, and the multiplier effect will only get smaller if it continues to expand infrastructure investment. As early as 2014, a northern province saw a situation where the total fixed asset investment exceeded the province's GDP in a year and continued to do so for another two years. That total fixed asset investment exceeded GDP indicates that a dollar of fixed asset investment did not produce a dollar of GDP, so the multiplier effect was less than one. Some academic studies clearly show that the multiplier of fiscal funds used to stabilize consumption should be more than three in cities and towns and five in rural areas.
In this context, with such a serious challenge to China’s growth (before our eyes), it is clear whether the top priority for 2023 is to stabilize consumption or investment. But in reality, unfortunately, there is still a very long way to go in terms of forming a consensus for policy-making and awareness across society, shifting mindest, and taking action on decisions. Much of China’s policy this year is still on stabilizing investment, and much of next year's financial resources may still be in investment. Backwardness in theory and decision-making mindest will definitely affect practice, which is why today's meeting is crucial. We need to recognize that stabilizing consumption is very important. Consumption is now already growing negatively. Exports grew at a high double-digit rate since June 2020, when they were positive, but reached the highest levels in 2021 and then fell. Exports fell in October and will see negative growth in the following months. The producer price index (PPI) is already leading the way at negative rates. Investment, even relying on fiscal stimulus, is also unsustainable and will fall. Exports will decline. Consumption is likely to have reached the bottom. In this case, the only way out is a timely change in mindest to effect the stabilizing of growth.
III. Policy Suggestions on Stabilizing Consumption
1. Stabilize consumption by increasing income
Stabilizing consumption must come from the income side, not the production side. The measure to promote consumption in western countries since 2020 is to issue consumption vouchers to residents. As long as it aims to promote consumption by increasing residents’ income, the measure will be effective.
In economics, consumptions depend on per capita disposable income and propensity to consume. When per capita disposable income declines, consumption goes down too, so it is essential to promote per capita disposable income of the people. It is unnecessary to note the difference in the marginal propensity to consume (MPC) between property income and wages, where the latter’s MPC is lower - and that relates to the propensity to consume.
We must think about promoting people’s disposable income. If when we talk about promoting disposable income, all we talk about is stabilizing employment, that’s just like 临渴掘井 (start digging a well when thirsty) because that would cost time to take effect and does not meet the urgency. Similar folly is when we talk about promoting consumption, we talk about building a good social security system. It is indeed important to keep on stabilizing employment and building good social security, medical, and educational systems, but these are long-term policies.
Promoting consumption, being a short-term policy, at most should only be combined with the strategy of boosting domestic demand. We shouldn’t confuse it with long-term policy goals, otherwise, the decision-making will be affected.
Therefore, the priority of stabilizing consumption is to increase the residents' income. One way to do this is to increase people’s income for the current period by giving out consumption vouchers or cash to residents. The former might be preferable, but both of them can increase people’s income and therefore stabilize consumption. Another way is to boost people’s property income, for example, to make the stock market prosperous so people can profit from it and consume more.
Therefore, the income of the residents must be increased immediately. Whether it is wage, one-off income, or property income, only when the income rises can the consumption increase. Unfortunately, even after the government realized the importance of promoting consumption, it still doesn’t want to give out cash or consumption vouchers, because the government thinks the effect will be “playing ducks and drakes” - the government will not see visible 政绩 political achievements like roads and buildings that they get from investments, and it doesn’t know how the average people will spend the money.
Therefore, at the moment, stabilizing consumption appears to have been strongly associated with the production side, such as giving subsidies for the production of certain products. Such consideration isn’t wrong, but it promotes production under the disguise of promoting consumption. The result is still the promotion of production, resulting in excess capacity and lackluster demand. The government has recognized the importance of promoting consumption at the macro level, yet in practice, it is still boosting investment and promoting production.
Fundamentally, the government hasn’t changed its mindest. A high-level governmental report said 要以促投资来稳消费 it is necessary to stabilize consumption by promoting investment, but how could consumption be stabilized by promoting investment? Investment is investment and consumption is consumption (they are two separate things), and we should promote consumption directly instead of trying to achieve it by promoting investment or production, which leads to excess capacity and underconsumption. Therefore, the highest priority should be increasing people’s income by giving out consumption vouchers or increasing property income, which needs the continuous appeal of scholars.
2. Promote the MPC of residents by cutting interest rates
When it comes to promoting the marginal propensity to consume (MPC), highlighting measures like improving the social security system and establishing a medical insurance system will only delay the issuing of a short-term policy. In the short term, the best way to promote the MPC is to cut interest rates. In 2020, the two ways to promote consumption in Western countries were to give out money and cut interest rates: the former increases the income of the people, and the latter boosts the MPC. Now the economy and consumption are sluggish, the residents tend to deposit more money instead of spending money if the interest rate can reach two or three percentage points via buying wealth management products. The residents either deposit their money or spend it, so when they deposit more, they spend less, and the choice is closely related to the interest rate. In 2020, when Western countries faced an economic downturn and tried to promote consumption, they once lowered the interest rates to zero or even negative, yet we do not dare to cut it by even 0.25% or 0.5%. This is also because the old mindest hasn’t been changed.
There are many reasons for not cutting the interest rate: to prevent the property bubble, the decline of the stock market, inflation, and to stabilize the yuan’s exchange rate, etc. And it is also true that the monetary policy has to consider multiple aspects: it has to ensure that the economy grows while stabilizing the price, the capital market, the real estate market, and the exchange rate.
However, what is the current situation of these variables? At the moment, the policy priority in China’s real estate market is to prevent the systemic risk from expanding, and it would already be a victory if the price doesn’t go down and the market doesn’t crash, so it would be unreasonable to not cut the interest rate in fear of a property bubble.
Also, China’s stock market hasn’t risen in ten years, and the share price of many publicly listed companies has reached the lowest in history, and the rise of the market can boost the property income of people and promotes both consumption and investment.
On prices, China’s Producer Price Index (PPI) went negative in October, and might remain negative for the next year, but that is the deflation in industries, and in daily life, we do not have serious inflation, so cutting the interest rate won’t cause too much problem.
As for the yuan’s exchange rate, now that the appreciation of the US dollar has ended and the Federal Reserve has slowed down hiking interest rates, the risk of yuan’s depreciation has been reduced. Also, the exchange rate of the yuan concerns only the external-facing sector of China’s economy, yet the interest rate impacts the entire economy - all the businesses and households. So, balancing all aspects, it is reasonable to cut interest rates and promote consumption. But for ten years, we have chosen a neutral interest rate policy. Now that the prices are fine, the real estate market faces the risk of declining, the stock market keeps going down, and the yuan’s exchange rate is relatively stable, yet we still don’t cut the interest rate. Then this is still the problem of an unchanged mindest in decision-making. Therefore, the way to promote the MPC of the residents and promote consumption is to cut the interest rate comprehensively. We can even loosen monetary policies comprehensively, such as reducing the reserve requirement ratio.
[Pekingnology: the seminar was held on Nov. 19. China’s central bank announced a cut in the reserve requirement ratio on Nov. 25.)
3. Boost the consumption that requires contact (catering, accommodation, etc. ) 接触型消费 by improving the epidemic prevention and control policies
Consumption scenarios are also very important. Many kinds of consumption that needs the consumers to be in a certain place cannot happen if the consumers cannot go to places such as restaurants and hotels. This involves the issue of how to make epidemic prevention and control policies more scientific and precise. With the “20 measures to further optimize COVID prevention and control work” (Pekingnology) published by the State Council recently, I believe that measures to prevent and control the pandemic in the future will be more accurate and have less effect on consumption that requires contact.
In conclusion, only by fundamentally recognizing the importance of consumption, and making efforts to promote income, lower interest, and improve the epidemic prevention and control policies at the same time to promote consumption can China’s economic growth rise in Q1 2023 from the bottom, and enter a new phase of development. (Enditem)
Comment: Some points TENG Tai made are very similar to what LIU Yuanchun (and Michael Pettis at PKU) made
The central government departments, on the other hand, have a well-established mechanism for stabilizing investment at all departmental levels, with trillions of yuan of capital investment being made without any barriers in decision-making. All local decisions to stabilize economic growth revolve around infrastructure building and investment promotion, and there are basically no measures related to stabilizing consumption.
…the government thinks the effect will be “playing ducks and drakes” - the government will not see visible 政绩 political achievements like roads and buildings that they get from investments, and it doesn’t know how the average people will spend the money.
our strategy to expand domestic demand tended to go through the investment side because it meets the needs of interest groups, and there is a mature system for its implementation
Michael Pettis (via Financial Times)
After three-four decades of supply-side policies, many of them taken to extremes never before seen, it isn’t surprising that China’s political, financial, and legal institutions are powerfully structured around a continuation of such policies.
A high-level governmental report said 要以促投资来稳消费 it is necessary to stabilize consumption by promoting investment, but how could consumption be stabilized by promoting investment? Investment is investment and consumption is consumption, they are two separate things, and we should promote consumption directly instead of trying to achieve it by promoting investment or production, which leads to excess capacity and underconsumption.
Michael Pettis (via Financial Times)
After three very successful decades of relying on supply-side measures to boost growth, Chinese authorities in the past decade have found it very difficult — almost certainly for both political and institutional reasons — to switch to demand-side measures to support growth.
Even when they specifically try to address consumption, they still end up proposing mainly supply-side policies. Last week, for example, the State Council, recognizing explicitly the need “to boost consumption as part of the effort to keep economic fundamentals stable”, proposed a series of policy measures to increase consumption.
For LIU Yuanchun’s speech
I find it amusing that when a government paper comes out you ae quick to interpret, but when a widespread protest against the government emerges there is silence...