China Maps Out Latest Plan To Boost Consumption, Raise Incomes: Here’s Why All Such Prior Plans Have Been Failures

It feels like every 3 months China comes up with another zany plan to boost the economy and kickstart consumption, which spikes stocks for a few days, but promptly goes nowhere, is quickly forgotten… only to be replaced with another zany plan 3 months later, and so on.

Today was no exception to this laughable cadence – which has achieved absolutely nothing but unleash core deflation in China for the first time since 2021 - and in a Sunday statement by Beijing State Council we learned that China will take steps to revive consumption by boosting people’s incomes, the official Xinhua News Agency reported.

Other just as vague measures include “stabilizing the stock and real estate markets, and offering incentives to raise the country’s birth rate, as the government tries to ease the deflationary pressures afflicting the economy.”

Of course, we have heard all of these over and over and over, and nothing at all has changed in the past 4 years. So we kinda doubt that anyone will care this time, but we are confident that HFT and various algos who have the memory of a goldfish will push Chinese stocks higher for at least a few days before the sellers inevitably take the upper hand again.

According to Xinhua, Beijing will promote “reasonable growth” in wages and establish a sound mechanism for adjusting the minimum wage. It will also look at setting up a childcare subsidy system, as well as strengthening how investment can support consumption. 

Other highlights of the plan include:

• Enlarge variety of bond-related products suitable for individual investors
• Adopt multiple measures to promote increase in farm incomes
• Raise financial help for some students
• Appropriately increase the basic pension for retirees
• Ensure timely and full distribution of unemployment benefits
• Support tourist attractions in expanding services and the reasonable extension of business hours
• Support opening of duty-free shops in cities where conditions permit
• Boost support for trade-in programs
• Lower the interest rate on housing provident fund loans at an appropriate time
• Scale back restrictions on consumption in an orderly manner
• Accelerate the development of new technologies and products such as smart wearables and autonomous driving

More details are available here, but they may well be moot: after all, invigorating consumption has been a challenge for the government since the end of the pandemic and everything Beijing has thrown at the problem has sunk into a seemingly unquenchable deflationary vortex. Retail sales have been anemic while consumer prices fell into deflation in February for the first time in over a year, although the latest macroeconomic dump suggests that things may be turning after all key data printed just slightly better than expected:

• *CHINA JAN.-FEB. RETAIL SALES RISE 4% Y/Y; EST. 3.8%
• *CHINA JAN.-FEB. FIXED INVESTMENT RISES 4.1% Y/Y; EST. 3.2%
• *CHINA JAN.-FEB. INDUSTRIAL OUTPUT RISES 5.9% Y/Y; EST. 5.3%

At annual parliamentary meetings this month, the country’s leadership made boosting consumption their top priority for the first time since President Xi Jinping came to power over a decade ago.

Ahead of the announcement, Chinese stocks rallied the most in two months on Friday after the State Council, China’s cabinet, announced that officials from the finance ministry, the central bank and other government departments plan to hold a press conference Monday on measures to boost consumption.

In a series of posts on X, China watcher Michael Pettis shared his skeptical view on the latest events in China, explaining why so far all attempts to kickstart the economy have failed. 

He starts by observing the above – namely that the government and Communist Party issued a lengthy list of planned initiatives on Sunday to get people to spend more, including larger pensions, better medical benefits and higher wages, but they “assigned many of these tasks to the country’s local governments, many of which are struggling under enormous debts and plummeting revenues from the sale of state land.”

This, according to Pettis, is the problem with every attempt to boost the consumption share of GDP.

He then notes that the sustainable way to boost consumption is to increase the share of GDP retained by households. But increasing their share requires explicit or implicit transfers from either businesses or government. If the household share rises, after all, someone else’s share must decline.

And while Beijing wants local governments to absorb said transfers, given their precarious cashflow positions, for now they can do so mainly by placing new burdens on households or businesses, e.g. through taxes, layoffs, fees, or cutbacks on existing services.

As a result, the net impact on households is reduced, and the remaining costs are absorbed by businesses. The former doesn’t help boost consumption, and the latter, by indirectly forcing businesses to absorb the costs, is bad for the economy.

The only other way to do so involves forcing local governments either to transfer to households a large part of the substantial assets they control, or to liquidate those assets in order directly or indirectly pay for higher household income.

The problem, according to Pettis, is that this implies a radical transformation of the relationship between Beijing and local governments and between local governments and the households and businesses in their jurisdiction, and given the sheer extent of the needed transfers, it will be very difficult.

This is why, for all the years of posturing and promising to boost consumption, it has been impossible for China to make much progress to reboot the economy. Since Beijing has to raise the household share of GDP by 10% at the very least, that means an equivalent reduction of someone else’s share.

Pettis also notes that many analysts insist that China will choose to avoid rebalancing altogether, but they miss the point. These levels of imbalance simply cannot be sustained if neither China nor the rest of the world can absorb the growing gap between consumption and production.

At the end of the day, China will rebalance one way or another. The important question is how it rebalances: whether an increase in the household share of GDP will occur in the form of a debt crisis and a sharp contraction in GDP, as occurred in the US in the early 1930s… or through many years of stable consumption growth and much lower GDP growth, as occurred in Japan after 1990, or of a surge in consumption that keeps GDP growth stable (which would be historically unprecedented).

These are arithmetically the only three ways to rebalance. And since all are extremely painful, either acutely now or chronically over the long-term, no surprise then that Beijing just keeps pretending it will do something while merely kicking the can until it is finally one day forced to do something.