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Commentary
Beijing so far has failed to boost consumer spending sufficiently to put the overall economy back on track. In response, the authorities have begun to consider truly radical measures.
One is to shift away from the value-added tax. So far, no firm proposal has surfaced, much less legislation. Still, the open consideration of such a change reveals how troubled China’s leadership has become about the economy’s sluggishness and the failure of its program to make the country’s economic engine less dependent on exports and more responsive to domestic needs.
The authorities began efforts to stimulate China’s domestic economy a couple of years ago. With limited success, it implemented
measures to stop the fall in construction and home buying brought on by the
property crisis that first broke in 2021. While residential real estate continues to fall, Beijing’s efforts seem to have
slowed the pace of decline and relieved some of the excesses.
The Chinese regime has poured investment monies into
high-technology projects, such as semiconductors, quantum computing, and electric vehicles, in an effort that for a while added enough to the economy to meet Beijing’s overall growth targets but ultimately has added more capacity than the country’s domestic economy can absorb, and thus backfired by increasing the country’s dependence on exports just as Washington’s and Europe’s hostility to China trade has intensified.
The regime’s planners knew that the greatest potential for domestic development lay with the Chinese consumer. Initial efforts to stimulate consumer spending, however, could only be described as a weak, short-term fix.
Beijing decided to use local governments to
subsidize trade-in prices for automobiles and large household appliances in the hopes that people would take advantage of the subsidies, dispose of these expensive items sooner than they otherwise might, and buy new ones. People took advantage of the program in larger numbers than Beijing expected, so much so that the activity exhausted budgeted amounts, and several local governments have had to
discontinue the program. But if Chinese households took advantage of the generous trade-ins, they remained cautious about spending, which has not responded as Beijing wanted.
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Recent data confirm the lackluster response of Chinese consumers.
Retail sales for July, the most recent figure available, were only some 3.7 percent above year-ago levels, a much slower pace of advance than the 5 to 6 percent gains averaged last spring and hardly enough to support Beijing’s goals, especially with Chinese
exports showing hardly any growth since last March.
Even more revealing of inadequate domestic demand are the signals coming from Chinese price data.
Consumer prices for July were slightly below levels of the same time last year, and food prices actually came in at 1.6 percent below year-ago levels. Meanwhile,
producer prices, which the Chinese statisticians refer to as “factory prices,” fell by 0.2 percent in July from June levels and were down by more than 3.5 percent from levels of July 2024.
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Against such a backdrop of failure, it is not surprising that Beijing has begun to consider radical action. The tax change proposal now receiving some attention comes from a paper prepared by the former head of statistics for the People’s Bank of China (PBOC), Sheng Songcheng. He and researchers at
CEIBS Lujiazui International Institute of Finance concluded that China must reduce its value-added tax (VAT).
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levels varying between 6 and 13 percent, the VAT adds considerably to the cost of almost all goods, including most consumer goods. Noting how this added cost discourages consumers, these researchers have illustrated one of economics theory’s oldest laws: “If you tax something, you get less of it.” And the VAT is effectively a consumption tax.
A change in the VAT would probably help, but even if Beijing were to embrace it, a shift from the VAT would still take a long time to implement. For one, China’s VAT is the single largest source of
government revenue, constituting as much as 30 percent of the total, depending on the year.
Before reducing the burden of the VAT on Chinese households, authorities would have to find another source of revenue and sell it to those in power in Beijing, to the Communist Party rank and file, and to local governments.
And there is another problem. Right now, VAT revenues are
allocated regionally according to where the taxed goods are produced rather than according to where they are purchased. Any departure from the VAT—full or partial—would face significant resistance from locales that depend on the current structure of distributions.
That Beijing is even considering such a wrenching change speaks loudly to the level of desperation among the nation’s leadership on this issue of reviving the Chinese consumer. And it is far from assured that such a radical shift would get the response Beijing wants. The facts on the ground today suggest that even if China could take steps in the direction of such a change, it will take a long time to move Chinese consumers, if it ultimately could.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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Udumbara
