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China Needs a Rethink on State Spending to Lift Slowing Economy

Three years of Covid restrictions have changed Chinese citizens’ spending habits, but Beijing faces tough decisions now on how to boost consumption

China may need to spend more on social services or cut outlays on other sectors to help lift consumption levels following the Covid-19 pandemic, which has made people more cautious on how they spend their money.
About 1% of working age adults in China have defaulted on debts, which limits their ability to access services and highlights the country's lack of personal bankruptcy laws to provide some debt relief. This image shows people walking on Nanjing Pedestrian Road in Shanghai (Reuters).


Three years of tough Covid-19 restrictions have changed the way Chinese citizens use and spend their money. And that is a key reason why the country’s economy has slowed dramatically.

Erin Yao would like to take street dance classes and travel, but instead of pursuing such goals, as many economists expected consumers would once China lifted its Covid curbs, she is saving more of her salary than during the pandemic, when she felt compelled to stock up on basic necessities.

“I would ask myself if I have enough savings for treating an unexpected illness. If I lose my job, do I have enough money to sustain myself until I find a new one?” the 30-year-old book editor said.

Yao’s reluctance to spend is the result of China’s economic growth model, which began in the 1980s, that many say has relied too heavily on investment in property, infrastructure and industry and not enough on empowering consumers to earn and buy more.


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Beijing faces tough decisions on spending

But while faltering growth in the world’s No-2 economy has given rebalancing a new sense of urgency, transferring economic resources to households would require difficult decisions that would cause even more near-term pain.

Specifically, boosting households’ share of national income would mean a decline in the share of other sectors, either businesses – in particular China’s sprawling industries – or the government sector.

“Their fall will make a recession unavoidable,” Juan Orts, China economist at Fathom Consulting said.

“We think that this is a price that Beijing is not willing to pay,” said Orts, who sees China heading towards “Japanification,” which refers to Tokyo’s “lost decades” of economic stagnation since the 1990s.


Boost social safety net?

In theory, Yao could spend more if she found a job paying more than her 8,000 yuan ($1,097) monthly salary, which is less than a fifth of what book editors earn in the United States, according to employment website Glassdoor.

But China’s employment market is weak, with youth joblessness at record highs above 21%.

The private sector, responsible for 80% of new urban jobs, is still recovering from regulatory crackdowns on tech and other industries.

Policymakers have vowed to boost credit to firms, but businesses are ultimately constrained by frail domestic demand.

Another way to get people like Yao to spend is to address their insecurities. Many economists have called on China to boost its social safety net to rebalance the economy.

In Beijing, where Yao lives, three-to-24 month unemployment benefits are worth up to 2,233 yuan a month, slightly less than what she pays in rent for her 12 square metre room.

Her parents live in rural China and will soon reach retirement age, after which they can each receive meagre annual pensions of up to 1,500 yuan.

Yao spends 300 yuan a month on her father’s medicines, the same as what a dance class costs.

“If the public medical insurance covered more expenses for the elderly, I would feel more secure,” Yao said.

Financial uncertainty is also discouraging her from having children, she added. China’s population is ageing and shrinking, especially in the 20-40 bracket, when people usually reach lifetime consumption peak.


Measures to boost consumption too meagre

Over the past month, various government departments have announced dozens of measures to boost consumption, heeding calls from a key Communist Party leadership meeting.

They include car and home appliances subsidies, extending restaurants’ opening hours and promoting tourism and entertainment activities.

Yao was unswayed and would prefer consumer vouchers, which some local governments in China have issued, but in amounts too small to matter at a macro level.

Businesses are similarly unenthused.

“We haven’t really seen anything in terms of really boosting demand,” said Jens Eskelund, president of the European Chamber of Commerce in China, adding “that would be more important than supporting the supply side.”

Wang Jiliu, 45, who owns a catering business in the Chinese island of Hainan, says revenue is declining, partly because people’s incomes haven’t improved much since the pandemic.

That, in turn, is affecting her own spending habits.

“I think in the same way: I will also control my desire to shop,” Wang said. “In the past, we used to eat out and travel, which we don’t do much anymore.”

Proposals for demand-side measures from economists include better and more widely available public services, higher social benefits, giving workers more legal bargaining power, or distributing stocks of state-owned firms to citizens.


Government sector vs private households

But who pays? An extra burden on businesses – through higher welfare contributions, for example – is another hit to employment and growth. That leaves the government sector, which is dealing with a municipal debt crisis.

Local governments, while cash poor, are asset rich. Net assets of non-financial state-owned firms reached 76.6 trillion yuan in 2021.

Michael Pettis, senior fellow at Carnegie China, estimates that if Beijing forces local governments to transfer 1-1.5% of GDP to households, China could maintain current growth.

“The wealth and power of local government, business and financial elites often depend on control of those assets,” he said.

“One of the really big conflicts is likely to be between Beijing and the local governments over how to allocate the various adjustment costs. That will become one of the most contentious political issues over the next two years.”


  • Reuters with additional editing by Jim Pollard




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Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd papers in Sydney, Perth, London and Melbourne before travelling through SE Asia in the late 90s. He was a senior editor at The Nation for 17+ years.


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