At the recent July 2023 meeting of the Political Bureau of the Communist Party of China's Central Committee, they named insufficient domestic demand as one of the key challenges facing its economy today. Xu Gao (徐高), chief economist of Bank Of China (BOC) International, the Bank of China's subsidiary offering financial services to enterprises and individuals, the world's fourth-largest commercial bank, recently published an article analysing this issue and making a novel proposal for universal redistribution of stakes in state-owned enterprises.
According to the IMF, China grew by 3.0 % in 2022 and projects 5 % in 2023. Although the Asian giant is leaving behind the double-digit growth of past decades, these figures are still far behind those of the Eurozone, which went from 3.3 % growth in 2022 to a projected 0.7 % in 2023, or the US, which remains at 2.1 %. Despite this, the Chinese government is taking seriously the new challenges of the new international and domestic climate. The July 2023 meeting of the Political Bureau of the CPC Central Committee, the recent statements of its central bank, and the analyses of the Institute of Economics of the Chinese Academy all agree on the need to direct state capacity towards increasing domestic demand. The general concern is that if global demand does not pick up, they could face severe problems of insufficient total demand in the face of their growing productive capacities. In contrast to the West, the Asian giant went through July 2023 in a slight transitory deflation of 0.3 % (CPI), which gives ample room for manoeuvre.
Among the elements shaping domestic demand, Xu Gao, chief economist at the BOC, considers increasing the share of household consumption in GDP a priority. According to Gao, this failure derives from an income distribution problem. The most significant part of purchasing power is in the hands of the corporate sector. The purchasing power of companies unwilling to invest due to the prospect of low returns and excess installed capacity does not translate into spending. One solution is to redistribute income directly from the corporate sector to the citizenry.
There are three classic paths that Xu Gao considers flawed for this objective. The first is to focus only on the propensity to consume without raising incomes, which implies increasing indebtedness. The second is to increase wages. It runs the risk of an increase in firms' wage costs and a loss of total jobs, thus reducing the share of wages in the entire economy. The third is to send money directly to people through transfers. Without a real improvement in people's future income expectations, short-term income gains run the risk of being saved by residents and not ultimately converted into consumption. To circumvent these potential problems, Xu Gao proposes an "Ownership Sharing Scheme of State-Owned Enterprises for All".
This plan establishes multiple public investment funds financed with capital from all state-owned enterprises, whose derived profits are distributed universally to the entire population. People cannot sell their shares, but once a year, they can withdraw dividends to spend them or use them to buy and sell the derivative rights in search of the highest possible investment return. In addition, citizens owning these derivatives can switch them between different public funds whenever they want, thus stimulating competition between them to attract them. According to the BOC economist, this plan will not only improve income distribution but also build a solid and trusting relationship between citizens and state-owned enterprises. It will generate a positive "wealth effect" for consumption as the entire population will feel directly involved in the development of public enterprises, which will influence the competitive dynamics of these funds. It is a way of generating market competition mechanisms without privatising SOEs while redistributing resources from the corporate sector to the people, thus stimulating optimal forms of consumption and investment.
In conclusion, while there is little doubt that the era of sustained double-digit growth is over for China, it remains well-positioned to achieve a significantly higher growth rate than most of the G-7. Its priority is to sustain some of its growth endogenously in an unstable international environment and a possible deterioration in external demand. Proposals such as Xu Gao's show that the enormous capacity of state-owned enterprises still allows the world's largest economy - measured in PPP - to think of innovative ways to redistribute ownership and stimulate the economy.
