- The Central Economic Work Conference signaled a new focus on pro-consumption policies to reduce the imbalance between excess supply and inadequate demand that has emerged in China’s economy following the pandemic.
- “Demand side reform” aims to promote consumption through income re-distribution rather than stimulus measures, but efforts to expand social welfare spending and re-distributive taxation face significant political obstacles.
- The work conference also signaled that fiscal and monetary policy will tighten in 2021, as priorities shift from pandemic-related stimulus to controlling financial risk.
The Politburo’s meeting on 11 December featured a new policy slogan, “demand-side reform,” that is likely become a key theme for economic policy next year, alongside “dual circulation.” The annual central Economic Work Conference (CEWC), where top leaders set policy priorities for the year ahead, concluded on 18 December and further elaborated on the meaning of this new policy concept.
A key feature of China’s post-pandemic economic recovery has been the imbalance between production and consumption. Industrial production and fixed-asset investment have led the recovery, posting positive year-on-year growth for the January-November period. By contrast, retail sales growth, an indicator of consumption, is still in negative territory for the year to date (though retail sales growth has been positive on a single-month, year-on-year basis since August). The excess of production over consumption has also contributed to China’s rising trade surplus in 2020.
Consumption without stimulus
Demand-side reform is related to dual circulation, as both slogans imply policies to promote domestic consumption. Dual circulation calls for “domestic circulation” – i.e., domestic production oriented towards domestic consumption – to take precedence over “international circulation” – i.e., export-oriented production and imports of foreign technology. Demand-side reform aims to promote domestic consumption through income redistribution. High-income households consume less as a share of income than low-income households, so downward re-distribution can reduce the overall household savings.
The use of income redistribution to boost consumption demand marks a contrast with previous rounds of pro-consumption policy, which relied on stimulus tools like subsidies for auto and home appliance purchases. Demand-side reform seeks to promote consumption without stimulus. The CEWC pledged to use taxation, social welfare, and transfer payments to promote income re-distribution. The World Bank, IMF, and Western economists have long called on China to boost social welfare spending to reduce precautionary savings – the impulse to save heavily for housing, health care, and retirement, based on the expectation that government-funded social welfare programs will not provide these benefits.
Demand-side reform is also a complement to “supply-side structural reform,” a policy slogan first unveiled in late 2015. Supply-side reform focused on the interlinked problems of excessive debt and excess capacity in sectors like coal and steel. Vice Premier Liu He, China’s top economic policymaker and the architect of supply-side reform, wrote in People’s Daily in late November that “China’s main contradiction [is] still on the supply side,” but Liu added that “demand-side management” should also be a high priority. “Demand-side management” re-appeared in the CEWC readout and appears to be roughly synonymous with “demand-side reform.”
Beyond the economic logic of re-balancing between production and consumption, the party has purely political reasons for trying to address income inequality, which has soared over the last two decades. But enacting significantly re-distributive policies will require overcoming resistance from state-owned enterprises, which account for a large share of tax receipts, and from local governments, which finance most social welfare spending.
Tighter policy in 2021
Beyond demand-side reform, the CEWC readout confirms a tightening bias for monetary and fiscal policy in 2021, which the Politburo first began to signal in July. China’s debt-to-GDP may rise by 25 percentage points to 270% by the end of 2020, the second-largest single-year jump on record, behind only the landmark post-financial crisis stimulus of 2009.
Liu’s People’s Daily essay in November made clear that debt cutting is back on the agenda for 2021, after the supply-side campaign faded in 2019-20 in favor of a new round of stimulus. The CEWC pledged to keep the debt-to-GDP ratio “basically stable” in 2021, a hawkish signal, but the readout also says there will be “no emergency turns” in policy – an effort to reassure markets that the shift towards tightening will be gradual and data-dependent.