Summary of Key Points
China's GDP growth of 5% in the first quarter of this year may seem impressive, but the actual consumption growth rate among residents was only 2.6%, the lowest in nearly three years, creating a contrast between seemingly strong macroeconomic figures and a cold reality for individuals. The growth has mainly been driven by high-tech investment on the supply side, AI-driven exports, and low-carbon initiatives, all of which are not closely related to the average household's income. On the demand side, consumption, the real estate market, and local finances are facing difficulties. The root cause lies in the excessive allocation of fiscal spending towards infrastructure (43%, three times that of developed countries), as well as inadequate social security (28%, less than half of what developed countries provide), leading to high levels of precautionary savings (32.4%) among residents, which discourages them from spending.
The World Bank recommends adjusting the fiscal structure by diverting some of the funds allocated to infrastructure towards improving social security. For example, doubling pension benefits would only require 0.6% of GDP and could boost consumption by 2-4%, representing a cost-effective investment in people's well-being.
The Paradox of GDP Growth and Consumption
GDP has increased by 5%, but consumption has only risen by 2.6%—almost half as much. This is similar to a company experiencing growth without corresponding wage increases for its employees. Why? Because GDP growth comes from the supply side (production) rather than the demand side (consumption). For instance, businesses in Dongguan that deal in foreign trade may have more orders but lower profits due to pressure from customers and exchange rate fluctuations, meaning that the production growth has not translated into higher incomes for residents.
The Three Drivers of Supply-Side Growth
What is supporting this growth?
1. High-Tech Investment: Increased by 4.5% in the first five months, while real estate investment fell by 16.2%, and infrastructure growth was only 0.6%. This indicates that high-tech investment is bearing most of the burden for growth.
2. Export Surge: Exports increased by 15.5% in dollar terms during the same period, with AI-related products (such as electronics and electrical goods) seeing a 31% increase. However, this is not due to China's strong competitiveness but rather because the world is competing for AI equipment, and China happens to be the largest manufacturing hub (e.g., for Apple phones and AI servers).
3. Low-Carbon Investment: Growing at 23% annually from 2022 to 2024, with significant investments in renewable energy, photovoltaics, and electric vehicles.
However, none of these sectors directly benefit the average worker's salary. High-tech investment involves companies purchasing equipment, export profits may go into corporate coffers, and low-carbon initiatives are primarily funded by capital, leaving residents out of the benefits.
The Three Weaknesses on the Demand Side
1. Consumption: Residents are hesitant to spend, relying on subsidies to maintain their spending levels.
The actual consumption growth rate is 2.6%, but precautionary savings have risen to 32.4% (from 29.6% before the pandemic). This is not due to a lack of money but rather fear of illness, unemployment, and old-age expenses, leading to high savings rates.
2. Real Estate: The real estate market continues to decline, with unfinished projects remaining unresolved. Investment in real estate has dropped by 16.2%, housing prices have fallen by 23% from their peak in 2021, and transaction volumes have halved. The pre-sale system has not been improved, making it difficult for buyers to purchase properties. Developers are facing financing challenges (bank loans down 36%), and there is an estimated shortfall of 20-48 million unfinished housing units, with government-backed programs only covering 7.5 million units.
3. Local Finance: Local governments are struggling to sell land and thus lack funds for infrastructure projects. Land sales revenue has decreased by 28.7%, limiting their ability to invest in infrastructure (hence the low infrastructure growth rate of 0.6%). They are forced to borrow, creating a cycle where poor land sales lead to reduced revenues, which in turn makes it harder to repay debts.
Misallocation of Fiscal Funds
China's fiscal spending structure is the opposite of that of developed countries:
- Infrastructure (capital expenditure): Accounts for 43%, three times higher than the OECD average of 13.5%. Funds are used for building roads and industrial parks.
- Social Security (healthcare, education, etc.): Only accounts for 28%, less than half of the OECD average of 60%. This means that too little money is allocated to support people's basic needs.
While infrastructure investment can drive economic growth during periods of high growth, its returns decrease when growth slows. In addition, insufficient social security discourages consumption, creating a structural bottleneck in the economy.
The Benefits of Improving Social Security
The World Bank has calculated that making significant improvements in social security could be highly cost-effective:
- Doubling Pension Benefits: Only 0.6% of GDP (about 700-800 billion yuan) would boost consumption by 2-4%. For example, if rural elderly people currently receive 246 yuan per month and their pension doubled to 500 yuan, it would be enough for them to buy some meat.
- Enhancing Medical Insurance: Raising the standard of medical insurance to match that of urban residents could increase urban consumption by 3.3% and rural consumption by 5.6%. Reducing out-of-pocket expenses for serious illnesses would encourage more spending.
Where should the money come from? By adjusting the spending structure, reducing the proportion allocated to infrastructure and diverting it towards social security, China could achieve better economic outcomes. This would not require additional funding but rather reallocate resources from inefficient infrastructure projects to areas that directly benefit people's lives, creating a positive cycle where improved social security leads to increased consumption and sustained economic growth.
In Conclusion
The "cracks" in the Chinese economy are not insurmountable; the issue lies in the wrong priorities. By focusing on measures that encourage spending (e.g., increasing pension benefits by 0.6% of GDP), people's wallets could be filled, and the economy could become more robust. It's like fixing a leaking roof—it doesn't cost much to fix it before it causes significant damage.