Boosting domestic consumption key to China’s growth

China should pivot its economic growth model from investment and export reliance to innovation and driving domestic consumption if it is to achieve its 5% annual growth target outlined in this year’s Government Work Report, a leading economic expert has said.

Liu Shijin, vice-chairman of the China Development Research Foundation and deputy director of the Committee on Economic Affairs of the CPPCC National Committee, said successful reforms would support the growth of China’s economy.

Liu said: “In the past two years, the economic recovery process after the pandemic has shown an overall upward trend in China, but still faces the pressure of insufficient demand, which is not a lack of investment, but a lack of consumption.

“From an international perspective, there is currently a gap of nearly 20 percentage points between China’s consumption-to-GDP ratio and the global average level. In terms of purchasing power parity, compared with OECD countries at roughly the same stage of development as China, the household consumption, service consumption and final consumption in China are about one-quarter to one-third different from the former. These reflect a structural deviation in China’s consumption patterns, influenced by several factors.”

He said China’s basic public services were facing problems such as low overall quality and large internal disparities. At present, the monthly pension of retirees from urban government departments and institutions versus other urban retired workers stands at about 6,000 yuan ($826) and about 3,000 yuan respectively.

“However, the gap between urban and rural areas is significant. Unlike urban residents, rural residents — who make up 95% of participants in the urban and rural residents’ pension insurance system — receive a monthly pension of just 220 yuan, which is just one-fifteenth of that received by urban retirees,” Liu said.

“On the other hand, the level of urbanization is low. In the services consumption sector, demand for goods has largely reached saturation. Services consumption – closely linked to urbanization – such as medical care, education, social security, culture and entertainment, remains difficult to access in traditional rural areas or underdeveloped counties.

“Even if residents are willing to consume certain goods or services, they often cannot due to a lack of services or high costs. As urban areas provide a high-quality services consumption environment, China’s population has increasingly migrated to urban centres, especially large first-tier cities in recent years. Therefore, enhancing urbanization is crucial for expanding services consumption.”

He said that a major reason for China’s consumption challenge is its wide income gap. Currently, China’s middle-income group consists of about 400 million people, but there are still about 900 million relatively low-income individuals. “International experience shows that, if the middle-income group does not account for the majority of population, it is prone to confront insufficient demand in the second half of the medium-speed growth period,” Liu said.

To solve the problem of insufficient demand and achieve the growth target, this year’s Government Work Report attaches great importance to consumption and prioritizes stimulus of it as its primary policy focus. It is required to address structural deviations so that the low-income segment with the greatest consumption potential can increase their spending power.

He added: “China should take efforts to steadily expand domestic demand. Accelerating urbanization and narrowing the income gap – with a particular focus on social security – are crucial steps. One approach could involve reallocating part of the government’s stimulus funds into the basic pension insurance fund for urban and rural residents, effectively doubling the monthly pension for 170 million rural participants, from about 200 yuan to 400 yuan.

“Moving forward, State-owned capital should be transferred to the pension fund on a large scale, with priority given to the basic pension insurance fund for urban and rural residents. In cities with large numbers of migrant workers, it is essential to gradually enhance social security and pension payment mechanisms, where some progress has already been made. Furthermore, the government should liberate the social productive forces in the integrated development of urban and rural areas, promote the two-way smooth flow of production factors such as people, land and capital between the two areas, and drive the second wave of urbanization in China.”