Li Xunlei: one billion people in China have never been on a plane

A 2019 catchphrase about flying pointed to an income problem. Seven years on, how much of his fix has been tried?

“One billion people in China have never been on a plane” has become a minor meme to be wheeled out whenever the conversation turns to weak consumption and an economy short of effective demand. It was first put forward in early 2019 by Li Xunlei, one of the most renowned chief economists among major domestic securities firms in China, as a warning that “latent” demand is not the same thing as spending power.

Of course, for many short- and medium-haul journeys, high-speed rail coverage has rewritten the case for flying. By the end of 2025, China’s high-speed rail network had crossed the 50,000-kilometre mark. Official figures say it now reaches 97% of Chinese cities with populations exceeding 500,000. And yet, even if high-speed rail explains part of it, the headline number still lands with a thud: one billion people in China have never been on a plane.

And it is worth returning, after seven years, to that original argument, published on 李迅雷金融与投资 Finance & Investment with Li Xunlei, Li’s personal WeChat blog on 23 January 2019, then asking that seven years on, how much of its prescription—raising middle- and low-income earnings, funnelling more state-owned capital into social security, easing housing leverage, and shifting more of the burden onto the central balance sheet—has actually been implemented, and where has it fallen short.

Li Xunlei is Chief Economist at Zhongtai Financial International Limited and has worked extensively at other Chinese securities companies, including Junan Securities, Guotai Junan Securities, and Haitong Securities. He has kindly authorised the translation.

—Yuxuan Jia

10亿人没有坐过飞机——究竟该如何扩内需

One Billion People Have Never Been on a Plane—What Is the Path to Expanding China’s Domestic Demand?

Two weeks ago, on January 9, 2019, I published “How Many People in China Have Never Been on a Plane—Exploring Paths to Expand Domestic Demand,” which has since sparked widespread discussion. Many of the comments suggest that most readers understood the core argument: the primary hurdle for China’s economy today is “insufficient effective demand,” rather than oversupply. Simply restricting supply will not solve the underlying issue; in fact, it is likely to further weaken demand and heighten deflationary risks. That is why the most urgent task now is to boost consumption, rather than focus on investment.

However, many readers misinterpreted the piece. They argued that since so many people have never been on a plane, it shows domestic demand is still huge, and China’s growth potential remains vast. But if that logic holds, wouldn’t it imply that the more underdeveloped a country is, the greater its growth potential, and that the future global order must therefore see developed nations decline while less developed ones rise?

Therefore, it is essential to distinguish between latent demand and effective demand. Latent demand describes people who want to consume but do not have the income to do so, whereas effective demand comes from people who have the purchasing power to buy goods and services they need.

It is also important to bear in mind the principle of a declining marginal propensity to consume: the more money someone has, the smaller the share of their income they typically spend. High-income individuals consume a lower proportion of their income, while middle- and low-income groups spend a higher proportion. As a result, the wider the income gap, the less conducive it is to overall domestic consumption growth.

Some people say a billion Chinese haven’t flown simply because high-speed rail is everywhere now, so there’s less need to fly. But I assess that if the roughly 280 million high-income earners are set aside, the remaining 1.1 billion people have only around 1,600 yuan in monthly disposable income on average, according to the National Bureau of Statistics’ 2017 statistical communiqué. That figure may be an underestimate, but even at 2,000 yuan a month, most people would still struggle to afford a plane ticket.

Migrant workers outside Kunming Airport are watching planes take off and land.

Since I posted my previous article, I have received some valuable feedback. The main points can be summarised as follows:

1. Over the past five years, the number of people who have taken at least one flight was about 230 million. In 2018, there were nearly 600 million passenger trips by air, but the number of unique passengers is estimated at around 100 million.

2. Over the past two years, roughly 50% of flyers were first-time passengers, suggesting that consumption upgrading is still underway.

3. With China’s population nearing 1.4 billion, it may be unsurprising that around 70% of the population (about one billion people) have never been on a plane. In Europe, about 40% of people have never taken a flight.

Therefore, the statement that “around one billion people in China have never been on a plane” is broadly accurate and not something to be particularly surprised by, given that China is still a developing country. However, I do not agree that this, in itself, justifies large-scale airport construction to meet so-called latent demand.

Take passenger throughput at China’s domestic airports. At first glance, total throughput appears to be growing rapidly, but the traffic is concentrated in a small number of hubs. Of China’s 229 airports, only 32 handle more than 10 million passengers a year, yet they account for about 78.5% of total passenger volume. By contrast, 179 airports handle fewer than three million passengers annually, and together they account for only 8.9%.

Chinese per capita incomes still lag well behind those in developed economies, which means latent demand remains substantial. The real question is how to turn that latent demand into effective demand. Broadly speaking, there are two ways to expand demand: investment-led growth and consumption-led growth. Investment can create jobs and spur development, which is why the saying goes, “If you want to get rich, build roads first.” But when infrastructure is built in excess, it can create overcapacity and push up economy-wide debt.

On the supply side, even as passenger turnover on highways has fallen sharply, total road mileage has continued to expand markedly. According to the Medium- and Long-Term Development Plan for the Comprehensive Transportation Network released in 2007, by 2020, China planned to have more than three million kilometres of highways in total, including 650,000 kilometres of Class II roads and above, and around 100,000 kilometres of expressways.

Yet by 2017, the reality was already staggering. Total highway mileage had already reached 4.77 million kilometres, overshooting the 2020 target by about 60%. Expressways totalled 136,500 kilometres, about 36% above the plan. At the same time, Class II roads and above made up only 13% of total mileage, falling short of the target share. This suggests an overbuild of lower-grade roads below Class II.

By contrast, passenger volumes on high-speed rail and urban metros are still rising, so further infrastructure investment in those areas remains worthwhile. Air travel is also growing quickly, but airport expansion needs to track population flows: new airports make the most sense in regions with high population density and fast industrial development. Highway expansion, however, likely needs to slow down. Highway passenger traffic declined in 2017, and passenger car sales also fell in 2018.

Throughout history, China has valued the idea of “teaching a man to fish rather than giving him a fish.” But that principle also requires balance. Right now, there seems to be a situation of “too much fishing gear and too few fish.” The priority in expanding domestic demand should therefore shift towards “replenishing the water so fish can thrive”—in other words, raising household incomes and strengthening social security so that consumption can play a larger role in driving demand.

In the previous article, I noted that the household penetration rate of flush toilets (including both seated and squat toilets with flushing functions) remains relatively low; households representing at least 500 million people still lack access to them. In fact, I made a similar point three years ago [February 2016] in an article titled The Toilet Dilemma Behind the Toilet Seat Craze, where I estimated that more than 600 million people lived in homes without flush toilets. Even in a developed city such as Shanghai, there were, at the time, still households representing more than 90,000 people using traditional wooden chamber pots.

In 2016, households representing over 90,000 people in Shanghai were still using chamber pots.

But a lot of people were thrown off by what happened three years ago, when Chinese tourists flocked to Japan to buy smart toilet seats. They took it as proof that domestic demand is bursting, and that consumers had no choice but to shop abroad to satisfy their appetite for consumption upgrading.

The ultra-high-income segment, accounting for around 5% of the population, does have outsized purchasing power. Bain & Company estimates that China’s personal luxury-goods sales rose 18% in 2018, a stark contrast with weaker mass-market retail spending. Between 2015 and 2018, the growth generated by Chinese consumers’ luxury purchases in China was roughly twice that generated by their spending abroad. Globally, Chinese consumers’ share of luxury spending continued to climb, reaching an estimated 33% in 2018, up from 32% in 2017.

Still, China is a vast country with a huge population, and it is risky to generalise from partial data. Beyond a relatively small wealthy minority, most people are in a situation where they want to consume but cannot afford to. As a result, those born in the 1980s and 1990s have become the main drivers of the surge in consumer credit. Even so, consumption growth has been slowing year by year, and many households still lack basic necessities; for example, nearly 30% of homes still do not have sanitary toilets. Weak effective demand, in turn, has left many firms under persistent overcapacity pressure.

China, therefore, needs to expand consumption. If household consumption strengthens, pressures such as overcapacity and the strains facing private firms can be substantially eased.

Across many economies, consumption typically accounts for 60–80% of GDP, while investment is closer to 20%. In China, by contrast, investment contributes around 40%, and consumption around 50%. The picture is clear: consumption is not yet pulling its weight as a growth engine. How, then, can consumption be accelerated? There are at least three routes. First, raise incomes for middle- and low-income groups as quickly as possible. Second, repay the “social debt” by increasing fiscal spending on education, healthcare, and pensions, so ordinary households feel secure enough to spend. Third, reduce the leverage associated with home purchases, so more household income can go towards consumption.

I suggest the following measures to promote consumption:

First, accelerate rural land transfer reform, including market-based transfers of collectively owned construction land, rural homesteads, and arable land. This will require legislation to ensure transfers are legal, fair, and properly regulated. Such reform would help raise rural residents’ income from properties, thereby supporting consumption. It would also advance rural urbanisation, the building of the “Beautiful Countryside” initiative, and the modernisation of agriculture.

Second, expand the share and the scope of state-owned capital transferred, without compensation, into the social security funds, in order to close the funding gap. That would also support consumption indirectly. For instance, U.S. household savings is close to zero, yet consumption accounts for more than 80% of U.S. GDP. One key reason is a complete three-pillar pension system, built on government, employers, and individuals. It includes employer-sponsored retirement plans such as 401(k)s, and individual retirement arrangements (IRAs). Assets held in U.S. IRA accounts far exceed the average level of household savings in China.

In 2018, China’s working-age population fell by 4.7 million, while the dependent population rose by 10 million. Population ageing is intensifying, and some provinces are already facing the predicament of pension outlays exceeding revenues. Expanding the free transfer of state-owned capital into the social security system should therefore help close both current and future funding gaps. Yet under the current 10% transfer ratio, only 15 to 20 enterprises were reportedly selected for equity transfers in 2018, far from enough to plug the shortfall. Going forward, both the share and the scope of state-owned capital transfers should be expanded, and the social security fund should be given greater rights to dispose of state-owned equity.

Third, uphold the principle that “housing is for living in, not for speculation”. This is a direction the government is already working towards, including by expanding the supply of rental housing. The real test, however, is outcomes. Renting is common across Western countries, but whether ordinary Chinese households will embrace it depends on pragmatic, credible implementation.

There is also hope that a property tax can be introduced, provided house prices remain stable. In theory, it is an effective way to reduce household leverage, support consumption, and narrow wealth gaps. The question is whether price stability can be maintained at the same time.

Fourth, expand central government fiscal spending on public well-being to gradually ease several “dilemmas” now emerging in the economy, such as households’ weak willingness to spend and private firms’ weak willingness to invest. At present, local government leverage is already high and needs to come down, and the same is true for the corporate and household sectors. By contrast, the central government’s leverage ratio remains very low, at around 20%. The question is, then, would a larger central fiscal role push the fiscal deficit ratio (the deficit as a share of GDP) beyond the so-called 3% threshold?

In my view, the so-called 3% deficit threshold is an old rule of thumb proposed by the World Bank many years ago. Many advanced economies have run fiscal deficits above 3% for years without triggering a fiscal crisis. China’s circumstances are different in any case: governments at all levels hold vast assets, including stakes in state-owned enterprises, land, and natural resources. That gives the central government considerable room to issue sovereign bonds and take on more leverage.

In 2008, in response to the subprime mortgage crisis, the U.S. government stepped up fiscal support, lifting government leverage from 57% to 97% by 2013. As the economy recovered under that policy stimulus, leverage in both the household and corporate sectors fell markedly. By the same logic, if the goal is to stabilise leverage across the Chinese economy, the first step should be a stronger push in central government spending on public wellbeing.

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