James Liang calls on Beijing to give money to families to boost consumption
The Stanford-trained demographer and entrepreneur underlines the consensus among economists for proactive fiscal policies.
James Jianzhang Liang is one of the Co-founders and the Chairman of Trip.com Group, one of the leading global travel service providers. He is also a Chinese population economist and a Professor of Economics at Peking University's Guanghua School of Management.
Below is a translation of his WeChat blog published on July 11, 2024.
梁建章：中国经济急需发钱消费
James Jiangzhang Liang: China’s Economy Urgently Requires Government Handout Cash to Boost Consumption
Overall stable growth but many difficulties
The recent national economic operation data released by the National Bureau of Statistics shows that while China's economy is growing steadily overall, it faces numerous challenges. One major issue is excess capacity in certain industries, coupled with insufficient effective demand, including both consumer demand and investment demand. Although China’s manufacturing value added has risen from 8% of the global share 20 years ago (in 2004) to 31% today, the population now represents only 17.5% of the global population, and consumption accounts for just 13% of global consumption. This indicates a significant gap between production capacity and consumption.
One consequence of this capacity-consumption gap is insufficient employment. According to data from the National Bureau of Statistics, in April 2024, the unemployment rate for the urban labor force aged 16-24, excluding students, was 14.7%. Data from the Ministry of Education indicates that the number of college graduates reached 11.58 million in 2023 and is expected to rise to 11.79 million in 2024, creating ongoing employment pressure as the number of graduates hits historic highs year after year.
Data from the Ministry of Finance reveals that from January to April 2024, national general public budget revenue was 8.0926 trillion yuan, a year-on-year decrease of 2.7%, while general public budget expenditure was 8.9483 trillion yuan, a year-on-year increase of 3.5%. The decline in fiscal revenue may be related to the cooling of corporate profits and the reduction of land transfer fees. Some local governments have sought to increase fiscal revenue by retroactively collecting taxes. For example, on June 12, Beijing Bohui Science & Technology Co., Ltd (688004.SS), a publicly-traded company, announced a production halt after receiving a tax collection notice for 5 billion yuan in March.
Despite numerous policies aimed at stimulating consumption and boosting the economy, some have not met expectations. As of the end of May 2024, the narrow money (M1) balance was 64.68 trillion yuan, down 4.2% year-on-year, the lowest since data collection began. The decrease in M1 is primarily due to the reduction in current deposits by enterprises and public institutions, especially enterprises. While term deposits are included in M2, only current deposits can be used for immediate investment needs like purchasing raw materials or paying wages. The decline in investment willingness among enterprises, combined with higher interest rates for term deposits compared to current deposits, has led to a shift towards term deposits.
[Zichen’s note: this is identical to a point that Li Yang raised not long ago.]
Real estate is a typical example of economic downturn. From January to May 2024, national real estate development investment was 4.0632 trillion yuan, down 10.1% year-on-year, with residential investment down 10.6%. This marks 26 consecutive months of decline since April 2022. The construction area of real estate development enterprises fell by 11.6% year-on-year, and the new construction area dropped by 24.2%. On May 17, the Ministry of Housing and Urban-Rural Development, the Ministry of Natural Resources, the People's Bank of China, and the National Financial Regulatory Administration jointly issued major policies unprecedentedly, including lowering down payment ratios and canceling interest rate floors. However, the effectiveness of these new real estate policies remains to be seen.
Many residents who purchased homes with loans are now unable to repay their mortgages due to layoffs or salary cuts, leading to a surge in foreclosed homes. Data from the China Index Academy shows that the number of foreclosed homes nationwide reached 796,000 in 2023, a record high, with 100,400 foreclosed homes listed in January 2024 alone, a year-on-year increase of 48.2%.
Due to the continued downturn in the real estate industry, overall capacity remains severely excess. Infrastructure demand in China, such as highways and high-speed rail, has already reached saturation, and large-scale investment projects may result in significant waste.
The stock market, often seen as an economic barometer, has also been underperforming. China's A-share market has repeatedly fallen below the 3000-point mark, characterized by significant losses and minimal profit opportunities. In contrast, the US and Indian stock markets have repeatedly hit new highs.
Professor Mao Zhenhua, co-director of the Economic Research Institute at Renmin University of China, estimates that from 2021 to 2023, the value of residential property assets shrank by about 9.8 trillion yuan, bank wealth management products by 2 trillion yuan, and stocks by about 5.4 trillion yuan. The continuous decline in asset prices has deteriorated household balance sheets, weakening consumption and expectations, further exacerbating the imbalance between supply and demand in the economy.
Low Household Consumption
Compared to most high-income countries and emerging market economies, China's household final consumption expenditure as a share of GDP is low. From 2012 to 2021, China’s household consumption rate (household consumption/GDP) was only 38%, 18 percentage points below the global average. In contrast, the investment rate (capital formation/GDP) was 19 percentage points higher. Compared with middle- and high-income countries at a similar development stage, China’s household consumption rate was 9 percentage points lower, and the investment rate was 11 percentage points higher. This disparity is even more pronounced when compared to high-income countries, particularly the United States.
In 1983, the total wages of Chinese employees accounted for the highest proportion of GDP at 33.89%, with household disposable income and consumption expenditure levels accounting for 62.45% and 52.01%, respectively. By 2022, these figures had dropped to 24.02%, 43.03%, and 28.62%, respectively.
Several factors contribute to the low level of household consumption in China:
1. A large amount of newly issued money flows to central and local state-owned enterprises and investment platforms rather than private enterprises and households. Consequently, ordinary households lack sufficient funds to consume.
2. People lack confidence in future income, leading to a significant increase in precautionary savings and a reluctance to spend.
3. The government sector retains a disproportionately high share of national income.
Current fiscal and monetary policies appear loose but only distribute money to enterprises, not households. If businesses remain pessimistic about the consumer market and demographic trends, they are unlikely to increase investment. To address this issue fundamentally, direct monetary distributions to households are necessary. Strong stimulus policies are needed to put additional funds directly into the hands of households.
Use Fical Deficits to Give Direct Payments to Households, Don’t Fear Inflation
There are concerns about whether direct payments to households could cause inflation. This depends on whether there is surplus capacity and sufficient employment. China is currently in a phase of overcapacity and insufficient employment, so stimulating consumption can utilize idle capacity and labor. At present, China faces deflation rather than inflation, making deficit-financed fiscal stimulus appropriate. While deficit financing cannot be a long-term solution, it is necessary under current conditions.
Using fiscal deficits to stimulate the economy during a downturn aligns with Keynesian economic theory, which has been widely accepted and employed since World War II. In the context of deflation, where there is insufficient demand and employment, fiscal deficit spending can have a significant multiplier effect without triggering inflation concerns.
According to basic economic principles, in situations of insufficient demand, fiscal deficit spending can have a significant multiplier effect without causing inflation concerns. Therefore, using fiscal deficits to provide child-rearing subsidies will have a clear economic expansion effect and promote long-term economic innovation. Additionally, direct payments or consumption vouchers can have a quicker impact compared to policies like lowering interest rates.
If the goal is to stimulate consumption through direct payments, this can be achieved via fiscal deficits. For a sovereign state with the power to issue currency, fiscal deficits can be financed by borrowing from the central bank. This process essentially involves a mere adjustment of numbers on the central bank’s balance sheet, known as quantitative easing.
Take Japan as an example. Over the past 30 years since the 1990s, Japan’s general government debt-to-GDP ratio has continued to rise. According to IMF data, Japan's general government debt-to-GDP ratio was only 69% in 1990, exceeded 100% in 1996, surpassed 200% in 2009, and reached as high as 261% in 2022. Comparatively, Japan has the highest government debt ratio among the world's major economies. Over the past few decades, Japan has successfully maintained low unemployment rates and virtually no inflation by running significant fiscal deficits to sustain employment and price stability.
Currently, China should be more concerned about deflation rather than inflation. A decline in prices leads to a weakening of people's willingness to consume. Moreover, as prices fall, the real value of personal and corporate liabilities increases because the value of the assets they hold shrinks, while mortgage loans from banks remain the same. This is a classic case of a "balance sheet recession" in economics, leading to economic downturns. The solution is to increase the money supply to avoid deflation.
Aside from using fiscal deficits to provide direct payments, other methods can also be used to raise funds. In March this year, Professor Mao Zhenhua suggested at the China Macroeconomic Forum that 10 trillion yuan in cash subsidies be distributed in batches (7,000 yuan per capita, approximately 1,000 USD), and 10 trillion yuan be reduced from infrastructure spending. There are various ways to raise funds for these cash subsidies. One way is to use the profits of state-owned enterprises, which amounted to 4.6 trillion yuan in 2023. Another way is to adjust the current fiscal expenditure structure by cutting previous expenditures on ineffective and inefficient infrastructure projects and redirecting them to consumer subsidies. Additionally, we must dispel the traditional notion that "consumption is wasteful." We have seen many places, including the United States and Hong Kong, maintain a healthy economic cycle during the pandemic largely because residents avoided a demand slump with the support of cash subsidies. In Hong Kong, each resident received approximately 25,000 HKD, and in the United States, each resident received about 3,400 USD. Consumption played a decisive role in maintaining economic prosperity.
Direct Payments to Families with Children: A Win-Win
Addressing the current insufficient economic demand through proactive fiscal policies is gradually becoming a consensus among economists. Some economists advocate for stimulating consumption by issuing consumption vouchers, but I believe direct cash payments are easier to implement and do not favor specific products or industries. A better and fairer method is to give money to families with children, as they bear the burden of raising children for society and help address China's severe low birthrate problem.
As China faces economic downward pressure, its birthrate and the number of births are also declining. The fertility rate in 2022 was only 1.05, merely half the replacement level. From 2017 to 2023, the number of births in China has declined for seven consecutive years. According to revised data from the seventh national census, the number of births reached 18.83 million in 2016, with a birthrate of 13.57‰. In 2023, the number of births dropped to only 9.02 million, with a birthrate of just 6.39‰, both less than half of those in 2016, hitting the lowest point since 1949.
China has become one of the countries with the lowest fertility rates globally due to various factors, including international trends like higher education levels among women and young people pursuing personal independence and enjoyment. Domestic factors include high costs of childbirth, upbringing, and education, high housing price-to-income ratios, and a shortage of daycare facilities. Relative to income, China has some of the highest childbirth costs in the world.
Giving money to families with children is one of the most direct ways to reduce childbirth costs. Since the implementation of the three-child policy, more regions have introduced or planned to introduce child-rearing subsidies, offering substantial financial incentives to encourage childbirth. However, the subsidy levels are still far from sufficient compared to most European countries, as well as Japan and South Korea. To improve China's fertility rate, more substantial financial support for families with children is necessary.
Providing direct payments to families with children can stimulate consumption and investment confidence in the short term. By giving money to households, various consumption demands can be stimulated and increased. Offering better loan policies to these multi-child families for home purchases can further stimulate the real estate sector. In the long term, an increasing population can enhance China’s innovation capacity and competitiveness. Population is crucial for innovation due to the scale effect. Large populations give countries and their businesses a significant advantage. Stable macroeconomic growth and a favorable economic environment also improve overall fertility rates, creating a virtuous cycle.
Encouraging childbirth through fiscal transfers to households does not waste social resources. If such incentives result in families having more children, the future contributions of these children to society will outweigh the initial financial support, generating positive returns and creating more wealth.
Our suggestion to stimulate the economy with direct payments differs from the 4 trillion yuan plan proposed during the 2008 financial crisis. The 2008 stimulus primarily targeted affordable housing and infrastructure construction. Our proposal involves direct payments to households, especially those with children. Providing money to families with children offers more long-term returns than traditional infrastructure investments. The key to determining whether direct financial support is healthy for the economy lies in whether it yields long-term positive returns. Investing in excess capacity or inefficient infrastructure projects could exacerbate overcapacity and financial bad debts in the future. However, providing financial support to families with children will not lead to overinvestment but will result in more urgently needed newborns.
The funding for child-rearing subsidies comes from general taxation. Some may question whether this is fair to single or childless families. In the long term, it remains fair because the future tax and social security contributions of these children will benefit everyone, including those without children. The current tax and pension systems effectively have child-rearing families subsidizing those without children. Providing child-rearing subsidies corrects this imbalance. Children are the future innovators, builders, workers, and taxpayers. Therefore, supporting families raising children is not only fair but also essential.
Specific Policy Recommendations on Direct Subsidies for Families
Here are specific policy recommendations for direct payments to families based on the number of children:
1. **Cash Subsidies:** Provide a monthly subsidy of 1,000 yuan for the first child, 2,000 yuan for the second child, and 3,000 yuan for the third child and above until the child reaches 20 years of age.
2. **Tax and Social Security Reductions:** Halve personal income tax and social security contributions for families with two children and fully exempt these for families with three or more children (with a cap for particularly wealthy families).
These child-rearing support measures are estimated to account for 2%-5% of GDP in fiscal expenditure. Amid low investment and consumption demand in the current Chinese economy, distributing trillions to households can also boost consumption. Child-related consumption can drive the real estate and durable goods industries. Additional children necessitate larger homes and vehicles, thus stimulating current consumption demand. If the birthrate increases, there will be more population, leading to a more optimistic long-term outlook for the Chinese economy. Population size is a fundamental advantage for innovation. China's remarkable achievements in the new energy sector in recent years result from its large market and talent pool.
Conclusion
The root problem of China's current economic challenges is insufficient effective demand and low household consumption, primarily due to households lacking sufficient funds to consume and raise children. To fundamentally address this issue, trillions must be directed to households, especially those with children. Direct financial support to households can stimulate consumption, curb deflation, promote employment, and create positive economic expectations. We believe that China's current economic issues are temporary and can be resolved through appropriate demand stimulation and child-rearing encouragement policies. In the long term, we remain optimistic about the continuous improvement of China's corporate innovation capabilities and the country's economic prospects.
