Political adviser says subsidies could help spur consumption recovery

Cash subsidies to low-income individuals, potentially in the form of digital yuan, are needed to stabilize their income level and facilitate the country's much-anticipated consumption recovery, said a national political adviser.

Gong Liutang, a member of the 14th National Committee of the Chinese People's Political Consultative Conference, said the ultimate impetus to consumption lies in people's income growth, which has come under pressure due to the COVID-19 fallout, especially among low-income individuals.

This has restricted the spending power of low-income individuals and could hinder the country's pursuit of domestic demand expansion and common prosperity, said Gong, who is also a professor of applied economics at Peking University's Guanghua School of Management and vice-president of Beijing Technology and Business University.

It is therefore necessary for the central government to provide short-term direct subsidies to low-income individuals in order to mitigate their income losses caused by the pandemic and unleash their spending potential, he said.

"Low-income individuals, in general, have a higher marginal propensity to consume when their income levels improve, meaning that boosting their incomes can generate a considerable expansion in consumption," Gong said.

He said that each 1 trillion yuan ($145 billion) in cash subsidies for low-income earners can generate about 3 to 5 trillion yuan in consumption.

Gong made the remarks as China is prioritizing expanding domestic demand to shield the country's economic rebound from external uncertainties, which has ignited discussions on whether the central government should launch consumer-oriented stimulus measures as some advanced economies, including the United States, have done during the pandemic.

Requiring efforts to give priority to the recovery and expansion of consumption, the latest Government Work Report stressed that incomes of both urban and rural residents should be boosted through multiple channels.

Last year, China's per capita disposable income stood at 36,883 yuan, up 5 percent year-on-year in nominal terms. By contrast, per capita disposable income of low-income individuals — the surveyed households in the lowest quintile in terms of disposable income — stood at 8,601 yuan, up only 3.2 percent compared with 2021, data from the National Bureau of Statistics showed.

With the country's per capita consumption expenditure reaching 24,538 yuan last year, Gong said the low-income group's disposable income of 8,601 yuan cannot meet the average need for consumption spending, pointing to the necessity of stabilizing their income levels.

The digital yuan, or e-CNY, could be an ideal instrument to deliver cash subsidies to low-income individuals, with the payments able to be directly sent to each eligible individual with a determined period of validity, Gong said.

The e-CNY has been increasingly used by local governments to boost consumption as the country expands digital yuan pilot projects. For instance, Guangdong province's Shenzhen launched 100 million yuan in digital yuan subsidies this year that were designated to be spent in restaurants.

Krishna Srinivasan, director of the Asia and Pacific Department at the International Monetary Fund, also told China Daily recently that well-targeted direct transfers to vulnerable households or short-term labor tax relief are advisable policy options to boost consumption.

In the medium term, Gong said efforts should be made to strengthen the social safety net for low-income individuals and rural migrant workers and better equip them with professional skills that are valued in the era of digitalization to improve their earnings potential.

This year's Government Work Report also highlighted the need to prevent and defuse local government debt risks, which Gong believes are overall controllable but should be properly addressed.

While the total size of local government debt remains manageable, Gong said some local governments — including those in Northeast China or those facing a rapidly aging demographic — could feel pressure in maintaining fiscal sustainability.

It is important to achieve reasonable economic growth to service government debt, strengthen transfer payments to regions under stress and establish a clear picture of the size and risk level of implicit government debt, he said.