China urged to support key middle class, fix social problems to ‘supersize’ domestic market

Policy adviser Liu Yuanchun says expanding weak domestic demand remains the ‘key measure’, with reforms needed to empower rural population
But unemployment, low wage growth and poor social security protection are holding back China’s 1.4 billion consumers as it eyes sustainable economic growth

China's economic recovery

Amanda Lee

Published: 8:00pm, 10 May 2024

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China needs to speed up improvement of its social security net, investment in equality of education and increase income for its middle class population, a policy adviser to Beijing said, to achieve a “supersize” domestic market and to be more competitive internationally.

Beijing has sought to avoid the so-called middle-income trap, the notion that emerging economies grow quickly out of poverty only to get stuck before they get rich.

But problems surrounding unemployment, low wage growth and poor social security protection are holding back China’s 1.4 billion consumers amid its efforts to curb reliance on the real estate sector to sustain economic growth.

“Expanding domestic demand is a key measure of current macroeconomic policy,” said Liu Yuanchun, president of the Shanghai University of Finance and Economics, in his book published in April on China’s development, its core issues and strategic paths.

The excerpts of Liu’s book, published in a blog post on Thursday by the Beijing-based think tank Finance 40 Forum, added to the chorus of views that the world’s second-largest economy needs to make way for meaningful reforms to address its weak domestic demand.

“As a very large economy, our country’s gap with high-income countries has further narrowed. It can no longer be an export-oriented economy. Continuous expansion of domestic demand is conducive to better meeting people’s new expectations,” Liu added.

Relevant policies should also promote the flow of better educational resources from developed areas to less developed areas

Liu Yuanchun, Shanghai University of Finance and Economics

On Thursday, China’s export growth beat expectations in April and expanded by 1.5 per cent compared to a year earlier, but analysts said that sustaining momentum in domestic demand remained “the key focus” to hitting the “around 5 per cent” gross domestic product growth goal for 2024.

Economists have long argued that China needs to abolish its hukou – the national household registration system – which has prevented workers from rural areas accessing often better social services enjoyed by their city-dwelling peers.

Premier Li Qiang pledged in March that permanent urban residency should be granted as “a matter of priority” to eligible people who have moved to cities from rural areas.

“How to achieve breakthrough development in the household registration system and public services for migrant workers in the future will play a vital role in changing the urban-rural structure and income structure,” Liu said, adding that the government should ensure students from different backgrounds have “equal” access to education.

“In addition to curbing restrictions on education for children of migrant populations, relevant policies should also promote the flow of better educational resources from developed areas to less developed areas.”

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Liu also proposed that China needs to increase the proportion of social security expenditure in its overall fiscal spending, as well as increase unemployment benefits – both to act as “buffers” to stabilise economic growth.

China’s spending on social security declined to 3.04 per cent of its gross domestic product in 2022 from 3.21 per cent in 2020, which is very low compared to the rest of the world, according to Liu.

Overall expenditure from its unemployment insurance fund also fell to 150 billion yuan (US$20.8 billion) in 2021 from 210.3 billion yuan in 2020, even though the fund covered more people during the period, Liu added.

China needs to be able to expand its middle-income group – generally referred to those with an annual income of between 100,000 yuan (US$13,838 yuan) and 500,000 yuan – empower its rural population and provide room for growth for microenterprises to achieve sustainable economic growth, Liu said.

“In the next five or 10 years, if we want to truly overcome the middle-income trap and form a supersize Chinese market, it is very important to have a plan to double the income of the middle class,” Liu said.

In March, state media reported that China’s middle-income population had passed the 500 million mark, up from the previous official estimate of 400 million as of 2019.