context: Disappointing economic statistics from July have spurred another round of debate over boosting consumption through cash handouts. Proponents argue similar programs prevented economic contractions in advanced economies during the pandemic and should have a similar effect in the PRC. But opponents point to high deposit rates indicating the problem is not a lack of household disposable income, but a lack of willingness to spend in the face of falling asset prices reducing wealth in real estate and equities. Beijing is against handouts, rejecting ‘welfarism’ and instead focusing on supply-side development to raise living standards.
The best time for cash handouts is in response to temporary economy-wide negative external shocks, contends Lu Ting 陆挺 Nomura chief economist. The PRC’s current economic slowdown, however, is not driven by this, but rather primarily by low domestic demand from falling property prices and tight local fiscal budgets. This makes issuing nationwide cash handouts imprudent and counterproductive. Cash handouts would crowd out private investment, increase government deficits significantly and pose a high inflation risk.
Increases in local government taxation and fines, coupled with stock market downturns, have discouraged businesses. Interest rates are at historic lows but that is not driving new spending, suggesting further rate cuts may not be as useful in reversing the current situation.
Focusing on targeted cash handouts and delivering guaranteed housing projects is a preferable policy choice, requiring
- stabilising real estate markets
- focus financing to complete building projects
- expedite investigation into issues preventing completion of building projects
- establish special fund for completion of building projects
- recover market confidence and order
- maintain affordable housing supply
- focus financing to complete building projects
- cash handouts for selective demographics
- basic pension insurance for disadvantaged groups (like farmers)
- basic health insurance for disadvantaged groups
- cash subsidies for childbirth
- control excessive local government debt financing and increase quantitative easing simultaneously
- drive consumption tax reform
- increase local governments’ tax revenue share
- improve transfer payments through indicators such as
- population flows
- household registrations
- student enrolments