China’s ambitious push to boost domestic consumption could be further enhanced if the government leverages its significant wealth and assets to directly support household incomes and social welfare, according to leading economists. The idea is to transition a portion of the State-owned capital—which currently is reinvested to generate new capital—into initiatives that stimulate consumption, particularly in critical sectors like education, healthcare, and social protection.
The Wealth Gap: State-Owned Equity and Consumption
Liu Shijin, a prominent economist and former deputy director of the Development Research Center of the State Council, pointed out that a large proportion of State-owned equity in China’s social wealth might be a key reason for the country’s insufficient consumption. According to Liu, while this equity is typically reinvested to generate more capital, it is not being utilized to directly support consumption, which hinders the potential for boosting domestic demand.
Liu’s comments were based on research from the Chinese Academy of Social Sciences (CASS), which found that government net wealth accounted for a staggering 37.6% of China’s total social wealth in 2022. This is in stark contrast to less than 5% in major developed economies like the United States and European nations. Government net wealth in China—comprising assets such as the holdings of State-owned enterprises (SOEs), public institutions, and State-owned stakes in joint ventures—totaled 291.6 trillion yuan ($40 trillion) in 2022.
This concentrated ownership in State assets has significant implications for both China’s economy and its consumption patterns. The wealth generated from these assets is typically reinvested into new capital, such as infrastructure projects or industrial development, but it is not being directly channeled into supporting household consumption or addressing social welfare concerns.
Proposal for Redistribution
Liu suggested that institutional reforms should be introduced to redirect a portion of State-owned capital into supporting domestic consumption, particularly in sectors that directly improve the quality of life for Chinese citizens. These sectors include:
- Education
- Healthcare
- Social protection
He also advocated for measures to address income inequality through redistribution policies, which would ensure that the benefits of economic growth are more equitably shared among all segments of society.
By transitioning from a model where State-owned equity is primarily reinvested for capital accumulation to one where it is used to stimulate consumption, Liu believes China could significantly boost domestic demand. This shift would not only help stimulate the economy but also demonstrate the country’s capacity to mobilize resources for major societal benefits.
Strengthening Countercyclical Adjustments
Liu’s comments align with ideas proposed by Zhang Xiaojing, the head of the Institute of Finance and Banking at CASS, who also sees a need for the Chinese government to transfer some of its existing wealth to the household sector. Zhang believes that this transfer could help China make unconventional countercyclical adjustments, supporting the country’s shift toward consumption-driven economic growth.
The Third Plenary Session of the 20th Central Committee of the Communist Party of China in July 2024 stressed the importance of introducing national macro balance sheet management, which could facilitate the redistribution of resources in ways that promote long-term, sustainable economic development.
Real Estate as a Driver of Consumption
One important aspect of China’s wealth distribution is its real estate sector. Zhang noted that compared to major developed economies, where real estate typically represents 50% or more of total social net assets, China’s real estate sector accounts for less than 40%. This lower figure suggests that the real estate market still holds significant potential for growth, particularly as urbanization continues and homeownership remains culturally important in China.
According to Zhang, the real estate sector’s long-term development could play a vital role in driving consumption over time. This would not only help stabilize China’s economic growth but also encourage more consumer spending, as Chinese households continue to value property ownership.
Expanding the Role of the Government in the Economy
The key takeaway from the discussions of Liu and Zhang is the need for the government to become more active in reshaping how State-owned assets are deployed in the economy. Strategic mobilization of these assets into areas that directly benefit households—such as through social welfare programs, education, and healthcare—could act as a powerful catalyst for boosting domestic consumption.
Further, by addressing income inequality and ensuring that wealth is redistributed more equitably, China could create a more resilient and consumer-driven economy. Liu’s proposal to shift focus from State capital accumulation to supporting household spending could provide the necessary impetus for the country’s shift to a consumption-led growth model.
Conclusion: A New Economic Paradigm
China’s current economic model has relied heavily on investment and industrial growth to drive its rapid development. However, the country’s ongoing economic challenges—coupled with an aging population and the need for more equitable wealth distribution—demand a shift toward consumption-driven growth. By mobilizing its substantial state-owned wealth for direct redistribution into sectors like healthcare, education, and social protection, the government could strengthen the economic foundation for the next phase of growth.
These efforts, alongside reforms in the real estate sector, could lead to higher household incomes, which in turn would stimulate consumption and create a more sustainable and balanced economy for China in the coming years.