China’s economic grand plan falls short on how to enrich people and enlarge middle-income group

Beijing laid out its 14th five-year plan and the 2035 Vision at the ‘two sessions’ meetings in Beijing
But both contain assumptions that China is experiencing an unstoppable rise against the West, and that its consumers will create a domestic market big enough to guarantee its continued growth

Zhou Xin

Published: 6:15pm, 15 Mar 2021

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Beijing’s grand plan for the next five years and its vision for 2035 have two big assumptions. One is that China is experiencing an unstoppable rise against the West, and the other is that China’s 1.4 billion consumers will create a domestic market big enough to guarantee the country’s continued growth.

To turn the second assumption into a reality, China needs to tilt its national income distribution in favour of the people. The 14th five-year plan and the 2035 Vision paint a rosy picture for the country’s future but include few details on what China will do to enrich the working class.

Creating a large and sustainable domestic market, led by consumer spending instead of state-led investment, is central to Beijing’s new development strategy of dual circulation, which in turn is a strategic answer to the challenges in China’s new development stage.

China’s policy proposals of boosting domestic demand are still based upon the conventional wisdom that Chinese households have saved too much and that the state has only to do a few tricks to convince them to loosen their purse strings

But it seems China’s policy proposals of boosting domestic demand are still based upon the conventional wisdom that Chinese households have saved too much and that the state has only to do a few tricks to convince them to loosen their purse strings.

But this notion may be wrong because China’s household savings at banks, which is often used as an indicator to show the country’s excessive savings, does not differentiate between rich and poor savers. More importantly, the debt level of Chinese households, particularly among younger generations, is already very high.

The biggest factor behind China’s weak domestic consumer demand is perceptions of current income and expectations of future income. While China’s economic boom in the last four decades has significantly increased average incomes, it has also created a yawning wealth gap. China now mints more billionaires than any country in the world, but around 200 million people are also struggling to make ends meet.

Beijing has pointed out the direction, but the path to that destination is still unclear

To be sure, the government’s plans do include a statement that China will enlarge its middle income group, but it is more of a wish than an action plan.

By China’s definition, China’s middle-income population is now around 400 million people, and a number of state researchers have suggested that China needs to at least double its size to 800 million.

If, after the eradication of absolute poverty, China can successfully bring the bulk of its population into the middle class, China’s bright economic future can be secured and the vision of common prosperity will be achieved. For now, Beijing has pointed out the direction, but the path to that destination is still unclear.