The Financial Times has conducted an analysis revealing that the Chinese government allocates less spending on its citizens compared to countries with similar or higher income levels. This trend may hinder Beijing’s attempts to stimulate consumption as a means to bolster its dwindling economy.
Next month, China’s leadership is scheduled to disclose new economic goals during the annual session of its largely ceremonial parliament. They are expected to introduce stimulus initiatives to address the challenge of weak domestic demand following the collapse of the property market.
World Bank data indicates that China’s government dedicates roughly 6% of its GDP to individual consumption, which encompasses services such as healthcare and social security that directly benefit citizens. In contrast, households contribute an additional 38%.
Analysis suggests that China’s government spending on individual consumption is lower than many members of the BRICS group, including Brazil and Russia, and other emerging and developed nations. Morgan Stanley’s chief China economist, Robin Xing, emphasized the necessity for Beijing to enhance government expenditure on social welfare to encourage consumer spending. Xing noted that without comprehensive social welfare reform, the populace would likely continue prioritizing savings over consumption.
Economists forecast that Beijing might elevate the planned central government budget deficit from 3% to 4% of GDP next month, alongside the announcement of additional government bond issuances to foster growth. Premier Li Qiang recently stressed the significance of domestic demand as a “dominating role” in the economy. China has previously rolled out subsidies to promote consumer spending as part of efforts to boost consumption.
Over recent decades, China has quickly developed its social welfare systems, extending pensions to rural areas and healthcare coverage to most of its 1.4 billion residents. However, the monthly pension payments and health insurance benefits in rural regions are often low.
Economists have advocated for further government spending to be directed toward increasing household consumption rather than traditional infrastructure investments. Data from 2021 indicates that India, despite being a lower-middle-income country with per capita output at about one-fifth of China’s, spent only around 4% of GDP on individuals. Meanwhile, the US and Mexico allocated similar proportions as China.
These figures illustrate China’s peculiar stance as a large economy with generally low consumption rates. Structural and cultural factors contribute to differences in consumption levels across countries. For instance, the US boasts a more developed social welfare system with greater private sector involvement, offering consumers a safety net that might encourage spending.
Lynn Song, the greater China chief economist at ING, observed that US households usually feel secure about their safety nets, whereas Chinese pensions are typically lower. In China, many retirees often rely on savings in addition to their retirement benefits, leading to a cautious financial outlook among households. In contrast, American consumers are more likely to utilize debt, boosting private consumption.
Alicia Garcia-Herrero, Asia Pacific chief economist at Natixis, pointed out that the US also benefits from mature insurance markets offering families protection against unexpected events. In China, while life insurance has advanced, other insurance forms are relatively less developed, leading to a culture of saving for contingencies.
Michael Pettis, a senior fellow at the Carnegie Endowment for International Peace, suggested that a substantial investment in existing retirees’ pensions could significantly boost consumer confidence in China. Pettis argued for doubling pensions as an immediate measure to encourage spending among current retirees.
