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Analysis by the Financial Times shows that the Chinese government spends less on its citizens than most other countries with similar income levels or higher income levels.
The country’s leaders will announce new economic targets at the annual meeting of the Rubber Stamp Parliament next month and unveil stimulus measures to overcome weak domestic demand after its property bubble burst.
According to the World Bank, states in China spend only 6% of GDP to pay for so-called personal consumption—from health care to social security services that directly benefit citizens—and household spending costs another 38%.
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Analysis of the data shows that government spending on personal consumption in China is classified as a middle- and upper-class income country by the World Bank, lagging behind most emerging countries, including Brazil and Russia. It is also lower than many other emerging economies.
Robin Xing, chief Chinese economist at Morgan Stanley, said the analysis highlights the need for Beijing to increase government spending on social welfare to unlock consumption.
“Without a deeper social welfare reform, people will retain all of this preventive savings rather than consumption,” Xing said.
Economists expect Beijing to increase its planned central government budget deficit from 3% to 4% next month and announce additional government bond issuances to help drive growth.
China’s second-place leader Li Qiang said Thursday that domestic demand should play a “leading role” in the economy. Over the past few years, the country has introduced subsidies for consumer purchases, as part of efforts to promote consumption.
In recent decades, China has rapidly expanded its social welfare system to expand pensions to rural areas and to expand health insurance to the majority of its 1.4 billion people. However, rural pension monthly payments and health insurance spending may be low.
Economists say any additional spending should go directly to traditional areas such as stimulating household consumption, rather than investment in infrastructure.
Using data from 2021 figures (the latest comparable figures) shows that the Indian government is a lower-level income country with per capita output of about one-fifth of China’s GDP. Meanwhile, the United States and Mexico spend the same amount as China.
But economists say that even these countries still manage much higher levels of private consumption than China, emphasizing the status of the world’s second largest economy, an outlier of its overall low consumption rate.
Economists say there are structural and cultural reasons for the differences between the two countries. For example, the United States has a better developed social welfare system and stronger private sector participation may give consumers more confidence to spend.
“American families are more comfortable with their safety nets on average,” said Lynn Song, chief economist at Big China. “In China, pension payments tend to be lower.”
In China, he said, most retirees “will eventually need to use their savings to pay for retirement benefits, and Chinese families may also have a generation of deep-rooted caution.”
On the other hand, in the United States, consumers are also more willing to use debt than their Chinese counterparts, Song said.
Alicia Garcia-Herrero, chief economist at Natixis Asia-Pacific, said that countries such as the United States also have higher-developed insurance markets that allow households to protect accidents.
In China, life insurance has advanced, but other forms of insurance are lacking.
“There is no way to guarantee – neither the government nor the private sector provides you with protection. So you need to save it,” Garcia-Herrero said.
Michael Pettis, a senior fellow at the Carnegie International Peace Endowment Foundation, said the best way to increase consumer confidence in China would be to invest heavily in existing retirees’ pensions.
“You do have to spend more money now. So everyone who has retired will double the pension – that will be in the expenses,” Pettis said.
