Zhang Jun advocates for household income focus, discourages infrastructure over-investment

Dean of Economics Dept., Fudan urges boost in real household incomes, debt swaps between local and central governments, faster nominal wage growth, and greater market liberalization.

Hi, this is Yuxuan Jia in Beijing. In 1960, the Japanese government's "Income Doubling Plan" significantly boosted national income and sparked a consumer revolution by doubling it within seven years, ahead of schedule. Over sixty years later, Prof. Zhang Jun, drawing parallels to Japan's economic strategy, proposes his own "Household Income Doubling Plan" for China, designed to address the country's post-COVID challenges.

Observing struggling small businesses and the vast population base behind them, Prof. Zhang recommends that from 2024, the Chinese government implement a comprehensive strategy to increase real household incomes, directing fiscal spending toward families, particularly those from the middle and low-income groups. Specifically, Zhang proposes a significant increase in transfer payments to families and suggests a potential doubling or even quadrupling of basic pensions for the elderly in over 60 million rural households.

Diverging from the traditional policy priority on infrastructure investment to boost employment and income, Prof. Zhang proposes that the government curtail non-essential spending in this sector. He argues against extensive infrastructure projects in 2024 and beyond, describing them as "neither necessary nor practical."

Additionally, Zhang urges debt swaps between local and central governments, faster nominal wage growth, and greater market liberalization to correct price index distortions and promote a healthier, more dynamic economic environment.

Prof. Zhang Jun is a Distinguished Professor of Humanities and Social Sciences, Dean of the School of Economics, and Director of the Research Institute of Chinese Economy at Fudan University.

The Chinese version was originally published on the official WeChat blog of 中国新闻周刊China Newsweek, a magazine under China News Service. It is also available on 张军说Zhang Jun Talk, the personal WeChat blog of Prof. Zhang.

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The Chinese "Household Income Doubling Plan" Should be Launched as Soon as Possible

Following the easing of the COVID-19 pandemic, China's GDP in 2023 witnessed a year-on-year increase of 5.2%, marking a return to its recovery path. Despite weak investment demand, consumption expenditure grew by nearly 10%, driving economic growth by 4.3 percentage points and contributing 82.5% to the economic growth.

The year 2023 witnessed a V-shaped rebound in household consumption expenditures, which is directly related to the low comparison base set during the pandemic. However, as the base effect wanes, the growth rate of consumption expenditure in 2024 is anticipated to be slower relative to 2023, unless there is an increase in policy support for boosting real household income. Therefore, it is imperative to launch a Chinese version of the "Household Income Doubling Plan" as soon as possible within this year.

During the pandemic, many countries and regions, including the United States, implemented increased fiscal support measures for household incomes, resulting in a rise in average income and spending capacity. Contrary to these examples, China did not launch a large-scale family income support initiative during the pandemic, while numerous micro, small and medium-sized enterprises (MSMEs) and individual businesses have continued to face significant pandemic-induced survival pressures to the present day. These pressures for businesses directly impact the broader base of families dependent on them.

In light of these challenges, it is recommended that starting in 2024, the government embark on a comprehensive strategy to support and enhance real household incomes, with fiscal spending directed towards families aiming to boost the real income of middle and low-income families. This approach should include a significant increase in transfer payments to families, encompassing government-supported childcare, basic education, and health services, alongside free or subsidized medical care for children and the elderly.

Moreover, the initiative should extend its benefits to rural areas, specifically targeting an increase, possibly doubling or even quadrupling, in the basic pensions for the elderly across over 60 million rural households in China. This initiative is estimated to effectively alleviate the growing tendency towards precautionary savings in Chinese families and is essential for ensuring the recovery and sustained growth of household consumption expenditures.

To facilitate the "Household Income Doubling Plan," it is crucial for the government to scale back on non-essential investment expenditures. In recent years, the macro economy has been plagued by overinvestment, macroeconomic imbalances, and increasing debt burdens. Therefore, prioritizing expenditures on equipment and replacement investments becomes imperative. Given the context of excessive inventory and diminishing marginal returns, launching large-scale infrastructure projects in 2024 and beyond is neither necessary nor practical.

In recent years, the Chinese government has maintained ample credit and liquidity support for effective investments, with the People's Bank of China introducing numerous new structural tools to enhance liquidity. These policies have employed a targeted and differentiated strategy aimed at preventing the recurrence of excessive investment stimulus. Through the implementation of policies that selectively support investments in certain industries while restricting others, there has been a structural shift in investment growth dynamics. Notably, investment growth in emerging industries has accelerated, while growth in real estate and infrastructure investments has decelerated.

Given the generally low marginal efficiency of local infrastructure investments and their financial challenges in cost recovery, curbing the pace of infrastructure investment should yield more benefits than harm. In the short term, pausing the expansion of local infrastructure investment is essential, particularly as many regions are burdened with heavy debt. Under these circumstances, it is prudent for the government to direct limited financial resources towards sectors capable of generating new momentum and structural transformations. Moreover, governments at all levels should allocate a larger share of budget expenditures to help families bridge income-expenditure gaps and help local MSMEs and individual businesses return to the market and resume operation. This policy focus is more important than blindly launching large-scale infrastructure projects.

The excessive debt incurred by local governments, which has constrained their expenditure expansion capabilities, necessitates urgent debt swap solutions from the central government. China's debt concerns are predominantly focused on the real estate sector and local governments. Despite the significant size of the debt, the transmission channels for financial risks in China are narrower than in Japan, where banks' cross-shareholding practices exacerbate risk dissemination. Moreover, in recent years, China's national regulatory authorities have been committed to preventing systemic risks. This all suggests that debt and financial risks tend to be contained within specific industries and regions, reducing the likelihood of widespread risk or a balance sheet recession akin to Japan's experience. However, to mitigate the negative impact of debt on aggregate demand, the Chinese central government is advised to issue larger-scale special treasury bonds to swap local government debts. It should also consider repurchasing part of the housing stock for conversion into affordable housing and long-term rental properties, which would help alleviate the debt burden on developers.

To promote sustainable long-term growth in domestic demand and household consumption expenditures, China should encourage faster nominal wage growth, ensuring it surpasses or at least aligns with the nominal GDP growth rate. The sluggish wage growth has also constrained price level flexibility at the macro level. In recent years, some macroeconomic indicators, including price indices, have not been corrected for distortions; prices in basic industries, including regulated service sectors such as energy, transportation, and urban basic services, have experienced minimal medium- to long-term fluctuations. Allowing for greater market liberalization to alleviate price distortions could enable market mechanisms to more effectively address macroeconomic imbalances. Furthermore, this could foster a reciprocal relationship between market prices and wages, potentially allowing for the elimination of distorted elements within price indices.

In conclusion, despite facing significant shocks in recent years, the Chinese economy has avoided a severe slowdown and has even identified expansion opportunities in certain areas, thanks to its diverse and regionally differentiated economic landscape. Leveraging this advantage fully by establishing a stable and optimized policy environment, offering appropriate incentives, and fostering greater institutional flexibility, sets the stage for expecting enhanced policy innovation, more market-oriented reforms, and more agile responses to economic changes at the local levels. I am convinced that the Chinese economy can continue to unleash the entrepreneurial and innovative energies at the grassroots level, positioning it to resume and sustain a path of robust growth.