China eyes demand-side reforms over stimulus measures to boost domestic consumption, economy

Frank Tang
·5-min read

Beijing has initiated a new push to unleash the economy’s domestic consumption potential, pledging to institute a series of reforms to overhaul long-standing structural problems in the economy.

The new focus on “demand-side reforms” would mean greater efforts on addressing difficult structural issues, such as unequal income distribution, improving the social safety net, and reforming land-use and ownership policies as an alternative to large-scale government-provided consumer subsidies and investment stimulus measures, which have been, until now, Beijing’s preferred methods to support growth, according to analysts.

Demand-side reform was first mentioned at the December 11 meeting of the Politburo, China’s top decision-making body, headed by President Xi Jinping. This puts the initiative on par with supply-side structural reforms such as curbing industrial overcapacity and reducing financial risks that have dominated China’s economic policymaking over the past five years.

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“We must break through bottlenecks, improve our weak links, and smooth the processes of production, distribution, circulation and consumption so that a higher-level dynamic balance between supply and demand can be formed,” the official Xinhua news agency reported, citing a Politburo statement.

The new policy focus dovetails with the dual-circulation economic strategy unveiled in May, under which China would seek to rely more on domestic demand and home-grown innovation to counter rising challenges in the external environment.

The initiatives also seek to address continued lukewarm consumer spending, which accounted for 57.8 per cent of economic growth in 2019 but was hit harder by the pandemic than other areas of the economy and has lagged behind investment, industrial production and exports in supporting economic growth this year.

The country’s retail sales – a key indicator of consumption trends in the world’s most populous nation – fell 4.8 per cent in the first 11 months of the year compared with the same period in 2019, according to data from the National Bureau of Statistics released on Tuesday.

There is still strong demand [for consumer spending] in areas such as education and health care.

Larry Hu

In comparison, industrial production rose 2.3 per cent, fixed-asset investment grew 2.6 per cent, and the value of exports expanded 3.7 per cent in the same period.

In the next few days, the government’s top policymakers will gather for the Central Economic Work Conference to decide on specific economic policy steps for the coming year, and they are expected to prioritise fixing the country’s economic vulnerabilities in the first year of the new five-year plan.

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Unlike a decade ago, when rounds of subsidies for home appliances and automobiles were rolled out to offset the economic impact of the global financial crisis, Beijing has implemented only piecemeal consumer subsidy steps so far this year – including a relaxation of auto-purchase restrictions in some cities, tax reductions and billions of yuan worth of consumer vouchers in cities nationwide – to counter the damage from the coronavirus pandemic.

Meanwhile, the government continued its efforts to crack down on speculative real estate demand and rising housing prices, such as by proposing new limits on financing for large property developers.

The new emphasis on using reforms to boost consumption comes amid evidence that traditional economic stimulus measures are losing their power to boost growth.

“As [ownership] of items such as home appliances and automobiles is already very high, stimulus for [purchases of] traditional consumer goods has become less effective than it was before,” said Wang Jun, chief economist at Zhongyuan Bank.

“Consumption is a slow variable in economic growth. Attempts at stimulus would bring no big boost, but would have large side effects,” Luo Zhihuan, an analyst with Yuekai Securities, wrote in a note. “To improve spending, the authorities must address issues such as the income gap, social security and housing.”

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Larry Hu, chief China economist at Macquarie Capital, said that the call for demand-side reforms reflected Beijing’s intention to “boost demand without stimulus”, given the government’s concerns about already high debt.

Although the new initiative may not be able to achieve results as quickly as it could from supply-side reforms, notably, industrial capacity reduction, Hu said that further government actions to stabilise property prices could help boost the spending potential of middle-income families.

“There is still strong demand [for consumer spending] in areas such as education and health care,” Hu said.

The National Development and Reform Commission, which drafted the new 14th five-year plan, said recently that China would soon surpass the United States to become the world’s largest consumer goods market.

However, China’s top leadership has pointed to a lack of quality in the supply of goods and services as being incompatible with people’s desire for a better life – particularly in areas such as education, jobs, revenue, retirement, medical care, living conditions and the environment.

“We must improve the quality of the supply to unleash the suppressed market demand,” Xie Fuzhan, president of the Chinese Academy of Social Sciences, wrote in a recent article.

Ding Shuang, chief Greater China economist at Standard Chartered Bank, said demand-side reform strengthens the government narrative of relying on China’s huge domestic market for the country’s long-term growth potential.

But in addition, “it reinforces market expectations that there won’t be a big [economic] stimulus next year”, he said.

China’s economy is widely expected to grow by about 8 per cent in 2021, thanks to the ongoing recovery and the low comparison base.

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