Growth revamp calls for greater efforts to boost consumption

Investment and consumption are domestic drivers that help stabilize economic growth, but their functions differ. Investment ends up as capital, which increases supply or expands capacity, whereas consumption serves to fulfill people's material and spiritual needs.

While both contribute to GDP, fiscal constraints necessitate a comparative analysis of their multiplier effects to determine the optimal expenditure allocation. The orientation of policy stimulus is shaped by multiple variables, and this analysis will examine the issue through four critical dimensions — China's domestic economic cycle, household income structure, fiscal expenditure structure and aging/urbanization rates. Although there remains significant academic debate, prioritizing consumption stimulus is justifiable within the current framework of expanding domestic demand.

Unimpeded economic circulation is a prerequisite for sustainable economic development. In 2020, the central call was for a dual-cycle development architecture with domestic cycle serving as the mainstay and domestic and international development reinforcing each other. However, the domestic cycle has long been hampered by bottlenecks, which contain persistent issues such as overcapacity in certain industries and insufficient effective demand. China's Producer Price Index has remained predominantly negative for most of the time since late 2012.

This year, the international cycle may also encounter renewed disruptions due to US tariff policies, likely redirecting a portion of goods to domestic markets and exacerbating the overcapacity pressures.

To stimulate consumption, creating favorable scenarios is important, but it is more crucial to accelerate household income growth. China's household consumption only contributes less than 40 percent to GDP, whereas in most economies this proportion exceeds 50 percent. Currently, household income growth tracks GDP expansion, but elevating consumption requires superior growth rates. In addition, by delivering higher-quality public services, social security in areas like pensions, education and healthcare can be improved to unleash household consumption potential.

The structure of fiscal expenditure exerts long-term effects on economic restructuring. Currently, central government transfers to local authorities exceed 10 trillion yuan ($139.6 billion), with localities shouldering approximately 85 percent of total fiscal expenditures. This imbalanced allocation undermines the central fiscal capacity to maintain macroeconomic control.

The central government's performance evaluation system for local authorities directly affects their conduct. While the central leadership emphasized the need to better leverage the fundamental role of consumption in stimulating economic growth and the key role of investment in improving the supply structure, the increased weighting of GDP growth targets in related evaluations has reinforced local governments' predisposition toward investment, as capital projects offer more tangible and immediate performance metrics than consumption stimulation. This explains why China's investment contribution to GDP has stabilized at approximately 42 percent, which is more than double the global average, reflecting structural biases in the growth model.

Two potential measures could be implemented to modify this situation. The first approach involves optimizing the performance evaluation metrics for local officials, such as incorporating the adoption of consumption's share of GDP as a core evaluation metric. Moreover, the central government could reduce transfer payments to expand its expenditure responsibilities and fiscal authority, which would enhance macroeconomic management capacity.

The concept of "investing in people" was introduced for the first time in this year's Government Work Report, reinforcing the nation's push to boost consumption. In policy implementation, the current people-centered philosophy must be translated into concrete actions. By allocating more resources for human development and social welfare, this strategy enhances overall human capital vitality, thus fostering long-term economic growth.

From the megatrends of accelerating aging and population mobility, enhancing investment efficiency and leveraging consumption's multiplier effects have become critically important for sustaining economic vitality. China's total population peaked in 2021 and has since declined for three years, with projections indicating this downward trend will persist. In addition, China officially entered "deep aging" (over 14 percent of the population aged above 65) in 2021 and is expected to reach "super-aged" societal status (over 20 percent) by 2030.

This accelerated timeline calls for a pivot toward consumption-oriented allocations, as global patterns demonstrate that societies entering deep aging inevitably transition into consumption-driven economies, while the more advanced a society's aging process is, the greater consumption's contribution to GDP becomes.

China's enduring population migration trends, including persistent rural-to-urban relocation, north-to-south redistribution, and westward-to-eastward movement, require infrastructure investments to keep pace, thereby enhancing labor productivity and overall economic efficiency. Otherwise, the diminished returns on investment would hasten debt accumulation.

China's infrastructure has achieved a globally unmatched scale, with its high-speed rail network accounting for over 60 percent of the world's total, while expressways and subways each exceed 40 percent of global totals.

Consequently, declining returns on investment have become inevitable, as evidenced by the continuous decrease in return on invested capital for urban investment bonds in recent years. Therefore, future investments must carefully evaluate regional demographic shifts, prioritizing anticipated returns and particularly assessing their potential to generate sustainable income and steady cash flows.

Amid population aging and the transition from general urbanization to metropolitan concentration, spatial agglomeration will intensify, and the multiplier effect of services consumption will exceed that of goods consumption, which is beneficial for employment absorption. Consequently, services sector development should be prioritized to elevate the share of services consumption.

The writer is chief economist at Zhongtai Securities.

The views do not necessarily reflect those of China Daily.