Social Safety Net and Government Policy for a Consumer-Led Economy

Key Insight

A prevailing narrative suggests China's relatively weak consumer spending stems from a lack of a comprehensive social safety net, compelling households into 'precautionary saving' as evidenced by a rise in the household saving rate from under 20% to approximately 30% of disposable income. This implies that a stronger social insurance system would boost consumption. However, this argument is challenged by data showing per capita consumer spending growth accelerating from 5.6% annually in 2001 to 8.4% by 2013, even as the old safety net was dismantled and new programs were in their early, underfunded stages, and the saving rate continued to climb. This suggests that rapid income growth from industrialization, rather than the social safety net, is the primary driver of increased consumer spending.

Despite the limited direct impact on short-term consumption, the government has made substantial progress in establishing a nationwide social safety net, replacing the old state-owned enterprise-based welfare system. Achievements include expanding minimum-income programs (benefiting 3% urban and 8% rural poor), rolling out national health insurance (covering at least 95% of urban and rural households, though benefits are meager), abolishing tuition for nine years of compulsory education, significantly expanding pension schemes to 700 million people (from 200 million in 2002), and initiating social housing programs in 2010. Government spending on health, education, and social security increased from 5% to 8% of GDP between 2005 and 2013. Key challenges remain, such as extending coverage to migrant workers and raising benefit levels meaningfully without creating an unsustainable fiscal burden for an aging society with fewer workers supporting more retirees.

To foster a vibrant consumer economy, government policy should focus on two main areas rather than directly attempting to boost already robust consumer spending. First, income distribution must be addressed by increasing the household share of national income, which is currently small due to corporate profits from capital-intensive industrialization being predominantly reinvested. Strategies include implementing higher environmental and resource taxes, allowing market forces to determine capital costs to reduce corporate profits (potentially leading to higher dividends for consumers), and enhancing competition to lower consumer prices. Second, policy should promote the development of services while deemphasizing industry, as services are generally more labor-intensive and redirect a greater share of revenue to household wages. These initiatives, embedded in government plans like the 12th Five-Year Plan (2011-2015) and the 2013 Third Plenum agenda, combined with demographic shifts causing rising wages, are expected to benefit future consumer markets, despite resistance from vested interests profiting from the current system.