Income redistribution seen as urgent task

China should look beyond short-term stimulus and decisively redistribute incomes to expand consumption, especially by transferring more State-owned wealth to the social welfare system, leading economists and policy researchers said.

Now is the time to act, they said, with the latest consumption stimuli, such as the trade-in programs, creating a window to plan for long-term reforms to sustain momentum after the immediate stimulus effects wear off, paving the way for the much-anticipated consumption-driven economic model.

"Policymakers have begun prioritizing bolstering domestic consumption, but a long-term structural reform framework is essential beyond short-term measures," said Chen Yuyu, director of the Peking University Economic Policy Research Institute and a professor at PKU's Guanghua School of Management.

Chen said that to increase consumption's share of GDP by 10 to 15 percentage points over 15 years for a more balanced and self-sustaining economic model, China must redefine the allocation of State-owned enterprises' profits, whose savings are now mostly reinvested into their own expansion.

"Reforms now emphasize SOE profitability. The next step is to establish a clear framework for distributing these earnings — a portion must be transferred to households and this should be acted upon now," he said.

Chen's views were echoed by another major policy think tank.

The central government should moderately reallocate government-held wealth to households, including via pensions, to foster economic rebalancing, the Institute of Finance and Banking, part of the Chinese Academy of Social Sciences or CASS, proposed in a recent report.

Recent policy developments signal an unprecedented commitment by policymakers to transition China's economic model toward consumption-driven growth.

According to the Government Work Report, ultralong special treasury bonds totaling 300 billion yuan ($41.3 billion) will be issued to support the expanded consumer goods trade-in programs this year, along with measures to provide childcare subsidies and raise old age benefits.

Han Wenxiu, executive deputy director of the Office of the Central Commission for Financial and Economic Affairs, said over the weekend that the country aims to increase the share of household income in national income.

Han said China has significant potential to expand consumption as its consumption-to-GDP ratio is about 20 percentage points lower than that of developed countries.

Final consumption, including government and household consumption, contributed 56.8 percent of China's GDP as of 2023 whereas household consumption contributed 39.6 percent, according to the latest official figures.

Robin Xing, chief China economist at Morgan Stanley, said apart from the short-term consumption subsidies, a more fundamental solution lies in social security reforms, such as easier access to public housing and healthcare for migrant workers to reduce their precautionary savings.

"To deliver that, China needs to do huge fiscal transfer to the benefits system," Xing said. "It's probably the central government's turn to try to fill the gap by either channeling dividends from State-owned capital to the social security system, or gradually shifting China's policy focus from supporting infrastructure to spending more on social welfare."

Xu Gao, chief economist at BOC International, estimated that transferring 10 trillion yuan of non-financial State-owned equity — out of a total of 102 trillion yuan as of 2023 — into the social security fund to subsidize low-income groups could expand consumption by at least 1 trillion yuan annually.

Acknowledging the proposal's feasibility, Zhang Bin, deputy director of the CASS' Institute of World Economics and Politics, nevertheless, said that achieving a huge short-term impact could be challenging, especially given uncertainties over SOE asset liquidity.

"Similar reform steps actually have been ongoing for quite some time. If you're expecting significant short-term changes, that might be unrealistic," Zhang said.

In 2017, the State Council issued a plan for transferring State-owned capital to strengthen the social security fund, requiring that 10 percent of State-owned equity in large and medium-sized SOEs and financial institutions be transferred to cover shortfalls in the basic pension fund. The transfer was largely completed as of last year.