Consumption, investment must promote each other to boost economy

According to the Central Economic Work Conference held in December, China will further ramp up efforts this year to drive its consumption revival from the effects of the COVID-19 pandemic, thus boosting the economy. Against such a backdrop, the country needs to form a virtuous cycle in which consumption and investment promote each other. It cannot focus solely on increasing the share of consumption in the GDP.

Challenges

Currently, China's household consumption, as a percentage of its GDP, is not only lower than that of developed countries, but even lower than that of most developing countries. This has always been recognized as a structural problem that hinders the sustainable economic development of the country.

As a result, some people believe that if the share of consumption in GDP is increased, China's economic growth rate can be largely increased as well, but this is not entirely correct.

Global practices have proved that there is no linear relationship between the share of consumption in GDP and income growth.

According to the World Development Indicators published by the World Bank, household consumption accounted for 73.9 percent of low-income countries' GDP on average in 2019, while the proportions in high-income and middle-income countries were around 58.8 percent and 51.6 percent, respectively.

Instead of simply increasing the share of consumption in GDP, what China should do is to increase the income of its residents and thereby improve both the quality and quantity of household consumption.

Since China implemented its reform and opening-up policy, its final consumption expenditure as a share of GDP has been negatively correlated with the economic growth rate. That means, when the country's economic growth rate increases, the share of final consumption expenditure in GDP will decrease.

To explain the causes of this phenomenon, the relationship among economic growth, consumption and savings needs to be clarified first.

Savings are the portion of income that is not consumed, part of which is used for investment, while the other part is for net exports. In real life, enterprises first make decisions about investment and net exports, and then the remaining products will be used for final consumption.

Over the past few years, with the Chinese economy growing rapidly, both investment and net exports have greatly increased. As a result, the demand for savings is on the rise while consumption as a share of GDP has declined.

Solutions

According to the Central Economic Work Conference, China expects to further unleash its consumption potential and promote investment with high returns this year. It will also strive to shape new consumption patterns and drive new forces of consumption.

The country needs to foster positive interactions between consumption and investment activities. The increased consumption should be able to raise the rate of return for consumer product manufacturing companies and service-based companies, which will increase both investment in the consumer products industry and the gross national income.

There are currently many homogenized products in China that do not have enough sales channels — and Chinese people's needs for medical care and senior care services have not yet been fully met.

Therefore, having entered a postindustrial era, which mainly relies on the services sector to boost the economy, China needs to keep an eye on the service industries, especially those related to medical care and senior care. It should further promote the digital transformation of the services sector and use 5G technologies to develop more high-tech products concerning key areas such as digital health.

Besides, the country needs to ensure an effective supply of community-based medical care and senior care services, as well as reduce relevant institutional costs. While effectively meeting the needs of the elderly, such moves can also help alleviate Chinese people's burden in caring for older relatives and make senior care an emerging industry with strong endogenous power. This will lead to more job creation. Thus, China's economic recovery can be further advanced.

Promoting consumption not only means encouraging consumers to spend more, but also implementing preferential policies in relevant industries to help them grow and cultivate more famous Chinese brands in the services sector.

Unlike the manufacturing sector, there is significant information asymmetry in most service industries, especially the high-tech service industries. Therefore, the government needs to set strict qualification standards for relevant enterprises and strengthen its supervision when practitioners enter the market.

China should also provide stronger support for the renovation and maintenance of necessary infrastructure in service industries closely related to people's daily life. By providing preferential treatment in terms of tax and rent, the country can better develop service industries and help deal with the major issues of its people, thus contributing to the sustainable growth of household consumption.

The writer is a professor at the School of Economics, the Renmin University of China, and a main member of the China Macroeconomy Forum, a Beijing-based think tank. The article was first published in Beijing Daily.

The views do not necessarily reflect those of China Daily.