Economic Insights – Update
The Chinese government currently allocates a smaller portion of its budget to personal consumption compared to other nations with similar or higher income levels, a factor that could impede Beijing’s efforts to boost consumer spending and invigorate its sluggish economy.
Next month, during the annual parliamentary session, Chinese leadership is expected to unveil new economic targets, alongside a stimulus package aimed at addressing the tepid domestic demand following the collapse of the real estate market.
World Bank data indicates that the Chinese government dedicates approximately 6% of its Gross Domestic Product (GDP) to what is termed “individual consumption.” This category encompasses essential services beneficial to citizens, such as healthcare and social security, while households contribute roughly 38% of total expenditure.
A recent analysis demonstrates that China’s expenditure on individual consumption is significantly lower than that of many emerging and advanced economies, with China classified as a high middle-income country by the World Bank.
Economic analysts assert that this data underscores the urgent need for an increase in Beijing’s social welfare spending to stimulate consumption.
They further argue that without significant reforms to the social welfare infrastructure, individuals will likely continue to adopt a precautionary savings approach rather than increasing their spending.
Rising Budget Deficits
Economists project that the Chinese government will raise its budget deficit target from 3% to 4% of GDP, in addition to potentially issuing further government bonds to bolster growth prospects.
Lee Qiang, President of the Chinese State Council, emphasized recently that domestic consumption should assume a “major role” in the nation’s economy. In recent years, China has implemented a series of financial incentives to encourage consumer purchases as part of broader efforts to stimulate spending.
Despite substantial advancements in the social welfare system over recent decades—including pension coverage extending to rural regions and health insurance for a majority of the 1.4 billion population—monthly pension payments and health insurance reimbursements in rural areas remain modest.
Economists advocate for any new expenditures to directly stimulate household consumption instead of prioritizing traditional investments in infrastructure.
Data reflecting 2021 figures—the most recent available for comparison—reveals that India, categorized as a lower middle-income country with approximately one-fifth of China’s income per capita, allocated only 4% of its GDP to individual consumption. Conversely, both the United States and Mexico maintain a similar expenditure ratio to that of China.
Nevertheless, economists highlight that these countries have succeeded in achieving significantly higher consumption rates than China, illustrating the latter’s unique position as the world’s second-largest economy with notably low consumption levels.
Several structural and cultural factors contribute to these discrepancies across nations. For instance, the more developed social safety net in the United States, combined with greater private sector involvement, instills higher consumer confidence.
“American families perceive greater security due to their social security network, while in China, pension payments tend to be lower,” noted Lin Song, Chief Economist for Greater China at ING.
She further remarked that many retirees in China must depend on their personal savings alongside pension benefits, coupled with a deeply ingrained caution that encourages families to maintain financial self-reliance.
In contrast, American consumers exhibit a greater willingness to utilize credit, which substantially elevates consumption levels in the U.S. compared to China.
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