Leading professor calls for massive govt subsidy to families at key forum
Zhang Jun, Fudan's Econ Dean, says China must abandon the construction-oriented budget structure to make room for social spending - and open up services.
Zhang Jun is Distinguish Professor of Humanities and Social Sciences, Dean of the School of Economics, and Director of the Research Institute of Chinese Economy at Fudan University.
He delivered a keynote speech titled 让中国家庭有更稳定的消费能力 "Enable Chinese Families More Stable Spending Power" in the 拓展消费新场景 "Exploring New Consumption Scenes" session of the 经济峰会 Economic Summit of the China Development Forum 2023 themed 经济复苏：机遇与合作 "Economic Recovery: Opportunities and Cooperation," on March 25 in Beijing.
The following is the transcript compiled by Shanghai Securities News, a Chinese newspaper, and posted in Prof. Zhang Jun’s WeChat blog.
(I thank Prof. Zhang for agreeing to and reviewing the publication on Pekingnology - Zichen.)
Enable Chinese Families More Stable Spending Power
Discussions about China's consumption share of GDP have been ongoing for at least 25 years. However, the consumption share has remained essentially unchanged during this period. In the early days, China’s consumption share was compared to that of developed countries, and it was believed to be relatively low.
Later, my colleagues and I researched and found that some statistical issues contributed to the low figure. For example, many real incomes, hidden incomes, and hidden consumption were excluded from the statistics, the most significant of which is spending on housing. As a result of the high homeownership rate, many individuals live in their homes and do not pay rent, and thus the 160,000 household consumption data survey [Note: the basis of the data reported by China’s National Bureau of Statistics (NBS)] did not account for this factor.
The National Bureau of Statistics later calibrated the measurement by estimating a virtual rent according to the depreciation rate, but we found that the virtual rent was significantly underestimated. Countries with a similar level of development as China spend 14-16% of GDP on housing, while it is only 4% in China, indicating a considerable underestimation (in China).
[Note: Zhang was saying that Chinese residents’ spending, as reported by the NBS, was lower because, by the standards of other comparable countries, NBS should have estimated higher spending for rent and put them into the spending numbers.]
Firstly, it's important to recognize that in the global context, consumption and household consumption share of GDP in East Asia are relatively low. Looking at China, Japan, and the "Four Asian Tigers", the consumption share of GDP in East Asia is still low compared to other middle and high-income countries.
Primarily, this is a cultural issue, as East Asians have the tradition of frugality, which is completely different from the spending habits of Westerners. East Asia has a culture where families have higher precautionary savings and think more about the future, especially the next generation. Consequently, current consumption spending in East Asia lags behind developed countries and even falls below the world average.
Secondly, specifically in China, there have been many discussions about the growth of consumer spending from various perspectives. However, one of the main issues is that consumer spending is strongly related to the development of the service sector, as evidenced by significant statistical correlations. Now at the middle-income level after graduating from the low-income level, there is limited room for growth in the Total Retail Sales of Consumer Goods.
The primary difference between developed countries and middle-income countries is household spending in developed countries comes from the service sector, and in middle-income countries comes from consumer goods related to manufacturing rather than services. Japan experienced a similar situation. Its consumption share of GDP was considered too low by many, partly due to the lack of openness of its service sector.
When a country's economy and manufacturing industry is highly developed, but services remain under strict government regulation with little openness to the global market, the productivity in services remains low, and the service sector is underdeveloped. That’s an important reason why a country's consumption share of GDP is relatively low.
Let’s look at China from this perspective. China’s current consumption share of GDP has not changed significantly over the years. China needs a substantial breakthrough in its consumption share of GDP, and that is related to the development of the service industry.
China's service sector, although steadily increasing its share in GDP according to current statistical standards(the value added by the service sector), is still relatively underdeveloped compared to the manufacturing sector. For instance, the overall development of education and healthcare lags far behind meeting the spending demands of households, which have seen increased income.
I believe that providing greater support in policy and investment to the service sector, just like the support to the manufacturing industry, particularly by making it more open and accessible to capital, including international capital, would significantly boost the development of China's service sector. This, in turn, would contribute significantly to increasing China's consumption share of GDP.
Lastly, regarding China's current situation, household savings have significantly increased in recent years. Each household has not significantly increased its consumer spending compared to income growth. Instead, more income growth is used for savings, such as precautionary savings for housing, retirement, healthcare, education, childbirth, and so on.
This reflects the current issue that needs to be addressed in China's spending. That is the problem of the burden of expenditure. On the one hand, the service sector requires better development from the supply side. This includes opening up access to the service sector, allowing more capital to enter, and increasing productivity. On the other hand, at the household level, for current household spending to rise, there must be more government or national spending for households.
In an article I wrote last year, the final sentence was: If we want Chinese households to spend more, the country needs to spend more for households. What does it mean? China's economic strength and economic size have reached a stage or even surpassed it, where the government needs to consider how to alleviate the burden of household spending on housing, healthcare, retirement, elementary education, and other aspects.
The expected future expenditure burden of each family in these areas largely determines their current consumption. The reason households have precautionary savings is to prepare for future spending in these areas. Therefore, it is crucial to implement national policies to cut these household expenses.
Lawrence Lau Juen-ye previously mentioned that, for example, is it possible for the state to pay all expenses for children under five? However, I even believe that it may be more appropriate to extend this support until elementary school - covering 5 years old and younger is not enough. The state could cover all costs related to childcare and other aspects before the child enters elementary school, with a gradual transition towards covering all spending in elementary schools.
In China’s government budget, a very small part is for households. China’s budget system is designed for more construction, not households. As a result, there are very few social security and welfare programs aimed at households.
I believe that China now has the resources to allow families to enjoy various benefits the state provides in multiple programs, some of which should be free and others subsidized. A detailed list and a policy framework should be established to provide families with a more stable, long-term, and predictable future.
Now, at least, the government should begin considering that apart from the large-scale infrastructure spending every year, a portion of the national spending should be diverted to design various social welfare programs, providing substantial subsidies and covering family costs.
Compared to developed countries that typically have dozens of items covered in their social security programs, China currently has fewer types of social security programs. I think we should allocate more national income to the households to ensure families have more stable spending power. (Enditem)
I think this would be the right development. If society develops more confidence that future care tasks will be borne by the future generation (e.g. through state-organized redistribution between the generations), there will no longer be any need to save so much and thus take money out of the cycle. In Germany, this was called the "intergenerational contract", which until the 1990s fully secured pensions through the incomes of working people. It was not until the neoliberal changes that this trust was destroyed and the banks were given the business of private pension provision, but at the same time they withdrew the money now saved from the market and, with the pension funds, created an institution that follows the logic of capital with the need to maximize profits, thus adding fuel to the fire of financial speculation.
Translated with www.DeepL.com/Translator (free version)
“Asians have the tradition of frugality,” when westerners were poor they were frugal. When they got money they saved because there were no social safety net. When they had money, they spent it. Chinese with money spend it. It’s not cultural, at least, not for long. But those comments do not detract from his key point, to boost consumption, let people have money, and where possible, have a social safety net to reduce the need to save large amounts of money for a rainy day. No need for roads to nowhere and ghost cities.