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China’s government spends less on its citizens than most other countries with similar or greater income levels, analysis by the Financial Times shows, potentially undermining Beijing’s efforts to encourage consumption to boost its flagging economy.
The country’s leaders will announce new economic targets at the annual meeting of its rubber stamp parliament next month and unveil stimulus measures to overcome weak domestic demand following the bursting of its property bubble.
China’s state spends only about 6 per cent of GDP on what is known as individual consumption — services ranging from healthcare to social security that directly benefit citizens — while households spend another 38 per cent, according to data by the World Bank.
Analysis of the data showed government spending on individual consumption in China, which is classified as an upper-middle income country by the World Bank, lags behind most members of the Brics group of emerging nations, including Brazil and Russia. It is also lower than that of many other emerging and developed economies.
Robin Xing, chief China economist at Morgan Stanley, said the analysis underlined the need for Beijing to increase government spending on social welfare to unlock consumption.
“Without deeper social welfare reform, people will keep all these precautionary savings instead of consuming,” said Xing.
Economists expect Beijing next month to increase the planned central government budget deficit from 3 per cent of GDP to 4 per cent and to announce additional government bond issuance to help drive growth.
Premier Li Qiang, China’s second-ranked leader, said on Thursday that domestic demand should play a “dominating role” in the economy. In the past couple of years the country has introduced subsidies for consumer purchases as part of efforts to boost consumption.
China has rapidly expanded its social welfare system in recent decades to extend pensions to rural areas and healthcare coverage to most of its 1.4bn people. But the rural pension monthly payments and health insurance payouts can be low.
Economists said any additional spending should flow directly into spurring household consumption rather than traditional areas such as infrastructure investment.
The data, which uses 2021 figures — the latest comparable numbers available — showed the government of India, a lower middle-income country whose per capita output is about one-fifth that of China, spent less on individuals at only about 4 per cent of GDP. The US and Mexico, meanwhile, spent about the same as China.
But economists said even these countries still managed much higher private consumption levels than China, underlining the status of the world’s second-largest economy as an outlier for its overall low consumption rates.
Economists said there were structural and cultural reasons for the differences between the countries. The US, for instance, had a better-developed social welfare system with stronger private sector participation, which might give consumers more confidence to spend.
“US households are more comfortable with their safety net on average,” said Lynn Song, greater China chief economist at ING. “In China the pension payments tend to be lower.”
He said in China most retirees “end up needing to use their savings on top of retirement benefits, and there is perhaps a generationally ingrained cautiousness for Chinese households to rely on themselves”.
In the US, on the other hand, consumers were also more willing to use debt than their Chinese counterparts, driving up private consumption, Song said.
Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, said countries such as the US also had more highly developed insurance markets that allowed families to protect against contingencies.
In China, life insurance had advanced but other forms of insurance were lacking.
“There’s no way to insure — neither the government nor the private sector is offering you that protection. So you need to save,” Garcia-Herrero said.
Michael Pettis, a Beijing-based senior fellow of the Carnegie Endowment for International Peace, said the best way to increase consumer confidence in China would be a large, immediate investment in the pensions of existing retirees.
“You really have to spend more money now. So all of those people who are already retired, double their pensions — that will show up in spending,” Pettis said.
