Prominent economist calls for stimulating consumption & shunning excessive investment

“when exogenous shocks & insufficient demand become structural or even a trend in the medium term, we must switch stimulus from investment to consumption rather than persistent, excessive 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.

The seminar featured eight speakers. Some of their transcripts have been published. Pekingnology today translates the speech of Liu Yuanchun, Co-founder of CMF and currently President of the Shanghai University of Finance and Economics. Liu was previously a Vice President of RUC. On April 29, Liu gave a lecture at the Politburo, according to the readout via Xinhua.

BEIJING, April 30 (Xinhua) -- On Friday afternoon, the Political Bureau of the Communist Party of China (CPC) Central Committee held its 38th group study session. Xi Jinping, general secretary of the CPC Central Committee, presided over the session, which is about regulating and guiding the healthy development of capital in China according to law.

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Professor Liu Yuanchun, vice president of Renmin University of China, gave a lecture on the issue and offered advice. The political bureau members listened carefully and had discussions.

The following views are compiled from Liu Yuanchun's speech at the CMF seminar. The emphasis is by Pekingnology, which intends to translate other speeches from the seminar.

精准科学构建一揽子消费刺激方案，实施扩大内需战略

Precisely and scientifically deliberate a consumption stimulus package, Implement the strategy to expand domestic demand

There is now a consensus among academia and even society at large that boosting consumption would build the foundation of our economic recovery and that raising the share of consumption in GDP is at the center of the future strategy. But why has the government not yet launched a comprehensive policy on the consumption side, and why has the academic community not come up with some better academic recommendations in line with the latest developments in global consumption policy? Several key questions need to be addressed.

I.  Boosting consumption is the key to initiating and accelerating the current economic cycle

From the studies on European and U.S. consumer markets, the intertemporal effects brought by boosting consumption may be much smaller than the intertemporal substitution taught in traditional economics, especially during the slowdown of economic cycles due to exogenous shocks. In the case of a broken economic circulation, short-term consumption stimulus is the key to starting and accelerating the economic cycle rather than an auxiliary tool in expanding domestic demand. Therefore, it is necessary to develop a consumption stimulus package, and not to worry too much about squeezing future consumption with too much current consumption stimulus; preserving the economic circulation is a core objective of consumption-boosting.

II. Consumption stimulus should be compatible with COVID controls

Why has the very aggressive consumption-stimulating policy adopted by the European countries and the U.S. achieved relatively good results? In particular, the United States, under the influence of the universal income plan and other trends of thought, has subsidized the consumption of all people. The effect on driving consumption is obvious. Why is it difficult for us to adopt such a policy? It is mainly due to the different prevention and control policies. Large-scale consumption stimulus must be carried out in a state of normal consumption, economic, and social order, without too much social distancing and “static management.” Otherwise, a large amount of consumption stimulus and corresponding subsidies will only lead to substitution effects and savings effects rather than boosting current consumption since people can not go out and there is no recreational or high-end consumption. This requires that the consumption stimulus policy be further optimized to match the precise and scientific prevention and control of COVID-19 rather than being promoted unilaterally.

III.  The fundamental differences between stimulating investment and consumption 

Our government is very good at implementing policies expanding domestic demand by investing in large-scale projects and supporting large enterprises - very good at making efforts on the investment side. Why do we prefer investment stimulus so much? Because we have many state-owned enterprises and need to create many jobs, with jobs and market entities to protect. From the perspective of interests and strategic positioning, 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. But on the consumption side, such a system does not exist.

Investment is demand in the current period and supply in the next period. Investment stimulus and consumption stimulus are fundamentally different in that consumption stimulus cannot be converted into supply in the next period, while investment has an after-effect: if the investment does not jump-start the economy in the short term, it has strong supply-side and financial-side effects. If we invest in the corporate side on a large scale without real demand, it can lead directly to 烂尾工程 unfinished projects, resulting in inefficient stimulus as well as the inability to produce a positive effect on the adjustment of the supply-demand balance. Therefore, when exogenous shocks and insufficient demand become structural or even a trend in the medium term, we must switch the stimulus from the investment side to the consumption side rather than using the investment stimulus persistently and excessively.

IV.  The strategy of expanding domestic demand is not equivalent to Keynesian counter-cyclical adjustment policy

When the lackluster demand and domestic demand become structural and even a trend that transcends the economic cycle, what we have to initiate is not a Keynesian counter-cyclical adjustment policy for short-term expansion of domestic demand but a strategy to expand domestic demand. The 20th National Congress of the Communist Party of China mentioned the need to combine the strategy of expanding domestic demand with deepening supply-side structural reforms as a core element of promoting high-quality development. The strategy of expanding domestic demand is fundamentally different from Keynesian counter-cyclical adjustment. The keynesian policy of expanding domestic demand is short-term counter-cyclical, but our strategy of expanding domestic demand is to be implemented in the medium- and long-term cycle, which is not dominated by counter-cyclical policies. Our strategy needs to cross the economic cycles and improve the proportion of domestic demand and its contribution to GDP growth through deep, structural reforms.

From the perspective of the strategy to expand domestic demand, a very important focus of expanding consumption is income. We must truly expand the proportion of residents' income to GDP at the strategic level, implement the 居民收入倍增计划 plan to double residents' income, and fundamentally change the situation of excessive savings. On the expenditure side, constructing a social safety net must be carried out to reduce the residents’ need to save money out of prudence and safety. In addition, it is necessary to work on real estate, which is crowding out consumption, to return housing to its nature of for living while providing large-scale support for subsidized housing and mortgages for the middle and low-end income groups. Finally, there should also be strategic arrangements in public services and some mid- and high-end consumption.

Therefore, we cannot equate the strategy of expanding domestic demand with Keynesian counter-cyclical short-term stimulus policies. Instead of simple stimuli such as offering one-off consumption vouchers, there is a need at the moment for short- and medium- and long-term initiatives that complement each other. We need to grasp the relationships between inter-cycle and short-term cycle initiation, COVID control and stimulative consumption policy, consumption stimulus and investment stimulus, and Keynesian short-term consumption stimulus and consumption strategy. Only by grasping these four relationships clearly can we construct the next consumption stimulus policy package in a very precise and scientific way. (Enditem)

Comment: The views sound familiar to what Professor Michael Pettis of Peking University has been saying.

Prof. Liu

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

Prof. Pettis in the Financial Times in April

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.

Prof. Liu

From the perspective of the strategy to expand domestic demand, a very important focus of expanding consumption is income. We must truly expand the proportion of residents' income to GDP at the strategic level, implement the 居民收入倍增计划 plan to double residents' income, and fundamentally change the situation of excessive savings…

Prof. Pettis in the Financial Times in April

But until Beijing is able to shift towards implementing demand-side policies that boost the consumption share of demand — and with it, business investment — by directly or indirectly increasing the share ordinary Chinese households retain of China’s total production, we are likely to see the same sort of data throughout the rest of the year.

If you are interested in other speeches from the 57th Seminar on Hot Topics in the Macroeconomy of the China Macroeconomic Forum (CMF), stay tuned.