China adviser calls for lifting consumption close to half of GDP

China needs to spend more heavily on public welfare in the coming decade to expand consumption to the point where it accounts for around half the economy, a policy adviser said, joining a chorus of experts in favor of a shift in resources from investment and production. Lu Feng, who’s also an economics professor at Peking University, said the country could aim for an increase in consumption of 5 to 10 percentage points as a share of gross domestic product over the next five to 10 years, from its current level of about 40%. “We have seen in the past few years that insufficient demand can cause serious troubles even with fast productivity growth,” Lu said during an event held by the university in Beijing on Saturday. “If left unaddressed, it can lead to a host of problems, such as sluggish consumer prices, weak business activity, structural unemployment pressure and low confidence.” The role of consumption in driving growth is in focus as policymakers prepare to draft the next five-year blueprint for the world’s second-largest economy, which covers the period from 2026 to 2031. Top officials signaled a policy pivot toward consumption after Donald Trump’s reelection as president, ramping up spending in areas like education and employment. Even so, they have taken relatively measured steps so far and stopped short of setting a specific target. Household consumption as a proportion of China’s GDP is lower than the global average of 56%, according to World Bank data, lagging even further behind a share of almost 60% seen in high-income countries. Lu, who’s acted as an adviser to the ministries of finance and human resources, is the latest prominent voice to advocate for boosting household income and spending. Peng Sen, president of the China Society of Economic Reform, said in March that authorities should make efforts to boost consumption to 70% of GDP by 2035. For several generations, China has focused on catching up with and exceeding the productivity and technological mastery of advanced economies, with the goal now within reach, according to Lu. But that pursuit skewed public resources heavily toward production and investment. Lu estimates the government is in control of public resources equivalent to 45% of China’s GDP, taking into account broad fiscal income as well as revenue from state-owned enterprises and institutions. Most was spent on investment projects and support for producers with measures such as tax cuts, he said. The government should substantially increase the resources allocated to the household sector, since lackluster domestic demand has become the main challenge facing the economy, Lu said. One of the options is to lift the amount of pension payouts for rural residents and unemployed urban dwellers. This would help boost consumption because low-income people usually have the highest propensity to consume, Lu said. The average pension for that group of residents was just 214 yuan ($30) per month in 2023, compared with the 3,162 yuan for private enterprise workers, according to official data. Policy Levers Speaking at the same event in Beijing, Xu Gao, chief economist at Bank of China International Ltd., proposed that authorities transfer 10 trillion yuan worth of state assets — such as equity in government-controlled enterprises — to the national social security fund. The pension boost could lead to an additional 1 trillion yuan in consumption per year, according to his estimates. Other possibilities include reforming the household registration system known as hukou to grant those who moved from the countryside to cities equal access to public services such as education and medical care, according to Lu. Separately, he said China’s previous methodology for assessing consumption may have underestimated its share by 5 to 6 percentage points. That’s because the statistics bureau used to calculate the value of the virtual “housing services” provided by homeowners to themselves based on the cost of construction — rather than incorporating the so-called rental equivalence method as in many other countries. A revamp in the official statistics method late last year could help correct the underestimation, and it’s already led to an upward revision of the 2023 GDP.

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China adviser calls for lifting consumption close to half of GDP