Elite Wealth vs. Mass Consumption: A Political Impasse || Digging into China

Hi, I'm Dong Xiong. Welcome to Digging into China, where we explore China in-depth to reveal unique perspectives. On June 26, Tianjin hosted the World Economic Forum's annual meeting of the new champions, also known as the Summer Davos Forum. Tianjin served as one of the venues, and one of its sub-forums focused on understanding the Chinese economy. During this discussion, Chinese economist Jing Keyu made a notable remark, if China cannot transition into a major consumer nation, it will never achieve true prosperity. For an economist in China to make such a statement is significant. However, her proposed solution was, frankly, impractical. She suggested fostering competition among local governments, but including consumption levels as a criteria for evaluating officials' performance, potentially as a weighted metric in their assessment. This would factor into their political achievements and influence promotions. Such an idea is quite far-fetched. China's political system employs numerous standards for evaluating officials, some of which are rather peculiar. For instance, family planning was once a critical benchmark and a non-negotiable one. If a region or state-owned enterprise failed to meet family planning targets, allowing excess births, the responsible official's career would effectively end, bonuses for state-owned enterprises would be withheld, and officials might even face dismissal. This led to extreme measures in many areas, such as forced sterilization and slogans like, if you don't abort when you are required, we will demolish your house and seize your livestock, or one person exceeds the birth limit, the entire village faces sterilization. Although the family planning standard has been abolished, a new metric has emerged, encouraging marriage and childbirth. Recently, some regions have seen absurd efforts to boost marriage rates, with officials urging elderly couples married for decades to re-register and obtain new marriage certificates. Why? In the past, particularly in rural areas, many couples held a wedding banquet and considered that sufficient. Formal marriage certificates were overlooked. In the era of paper records, these marriages frequently went undocumented, and in the digital age, they are even less likely to be recorded. So, officials now demand obtaining a new marriage certificate, artificially inflating marriage rates. Fertility rates are also part of performance evaluations. In urban areas, neighborhood committees contact women of childbearing age inquiring about their menstrual cycles and reproductive status, as long as they haven't reached menopause. These inquiries are tied to various assessments. Other unusual standards exist, such as the push to create sanitary cities, a significant criterion for evaluating local officials. Each year, when inspections for hygiene occur, local governments enter a frenzy. Illegal structures are demolished, cigarette butts and street stains are scrubbed away, and fines accumulate, often disrupting residents' lives. Once the inspection period ends and hygiene officials depart, the issue is quietly shelved until the following year. Thus, Jin Keyu's proposal to include consumption in officials' performance evaluation is impractical. As a domestic economist, however, this may be the extent of what she can propose. Why can China become a major consumer nation? This question has been widely debated, and I believe three primary reasons make it unattainable. First, China has never established a robust social security system. Without a reliable safety net, people are reluctant to spend. Why has this system not been developed? In fact, during the Mao era, China had a form of social security, integrating everyone into the socialist economy, a system often described as from cradle to grave, where all needs were met. This system, however, primarily covered those with urban household registrations, excluding the vast rural population. Farmers had a different form of security, land. Agricultural produce from their land provided a measure of stability. Yet this system was flawed. Elderly individuals had no real safety net and relied on their children for support. Nonetheless, society as a whole had some level of security, including rural barefoot doctors who offered basic health care. This was the Communist Party's initial vision for a comprehensive social security framework. Though it wasn't called that, it was a total-care system rooted in socialist and communist principles. Over time, it became clear this model was unsustainable. Communism proved to be a flawed concept, a failed social experiment attempted by many countries, none of which succeeded. This realization led to China's reform and opening up. In the early stages of reform, the existing social security system remained untouched. Social insurance contributions didn't exist. It wasn't until the 1990s that a broader socialized system emerged, starting with state-owned enterprises. Only after 2000 did the civil service system begin contributing to social insurance, with a portion of income dedicated. Even then, a true social security system wasn't established, as the Communist Party didn't view it as an immediate priority. They believed it could be deferred. The longer they delayed, the greater the burden became. The older generation, my parents' cohort, those within the system exchanged low wages for social benefits like pension and health care. They didn't contribute to social insurance, yet their pensions are substantial, far exceeding their salaries. For example, in the early 1990s, my father earned 100 yuan monthly, but his pension now is 10,000 yuan a month. The failure to build a proper system earlier had shifted the burden to the next generation. China's current social security system was destined to be unsustainable from the outset. Following China's entry into the WTO, the economy experienced explosive growth. Where did that wealth go? The Communist Party didn't invest in building a robust social safety net. Instead, they focused on two things. First, they channeled funds into inefficient infrastructure projects. Typically, governments invest in infrastructure during economic downturns, following Keynesian principles, as seen in Roosevelt's response to the Great Depression, using public works to create jobs and stimulate the economy. The Communist Party, however, became obsessed with infrastructure, investing heavily even during economic booms. Much of this was inefficient, wasteful spending such as constructing elaborate highways in sparsely populated rural areas. They neglected to build the social security system that was needed. Why? Political achievements, measured by GDP, took precedence. Infrastructure projects are the easiest way to boost GDP, while establishing a social security system is time-consuming and yields slow results. The entire political system is geared toward pursuing rapid GDP growth and striking urban development. Had China invested in a social security system during its economic boom, the current situation might be different. A recent disciplinary commission audit revealed that many cash-strapped local governments have misused pension funds to cover salaries, totaling 400 billion yuan. This underscores the severe depletion of social security resources, particularly pensions. The second reason China cannot become a consumer nation lies in its flawed tax system. Taxes are heavily concentrated on production rather than consumption. When a product is manufactured, taxes like value-added tax are collected, regardless of whether it sells. This creates a mindset among local governments. Production equals tax revenue. The tax system revolves around production. In many other countries, taxes are levied on consumption sales tax. Businesses face fewer production taxes, leaving them with greater profits. More profits lead to increased investment, research and development, higher wages, and ultimately greater consumer spending, a virtuous cycle. In China, however, the government encourages overproduction because it generates taxes. This results in overcapacity, intense competition, costs cutting low wages, and companies seeking growth abroad by exporting excess capacity. This explains why Chinese people work diligently yet remain far from affluent. Why does the Communist Party favor taxing production? It's easier to control, more cost-effective, and more efficient. Taxing production allows them to exert a greater influence over business compared to consumption taxes. This is a significant barrier to boosting consumption in China. The third reason is political. From a political science perspective, consumption involves distributing wealth to a broader population. Wealth is a prerequisite for consumption. While the United States grapples with significant wealth inequality and a strained middle class, it still manages to distribute wealth more widely across society. Money equates power. Economic strength translates to political influence. When individuals or entire social classes gain wealth, they seek greater political power. To stimulate consumption in China, ordinary citizens, not just a selected few, must have wealth. It's not that Chinese people lack money entirely, but wealth is concentrated among a small elite, including powerful families and officials. This group, while significant in absolute terms, perhaps outnumbering the population of some small nations, is a tiny fraction of China's vast population. They cannot drive significant political change. Most Chinese people are focused on mere survival, spending to get by rather than consuming in a meaningful sense. Does the Communist Party's ruling elite not understand that boosting domestic demand and consumption requires fairer wealth distribution? Are they unaware of the need to provide citizens with money, including through robust social security, pensions, and health care? They are fully aware, yet they cannot act on it. Why? First, it would require the top-tier interest groups to relinquish some of their wealth and unlikely prospect. Second, sharing wealth with the middle and lower classes would inevitably lead to demands for greater political power. The Communist Party would never allow this. Their goal isn't to create a consumer nation, but to build a so-called great power where a small affluent elite maintains unchallenged rule. Beyond these three reasons, other factors impede China's path to become a consumer nation. A collapsing real estate market, a burst wealth bubble, an aging population, urban rural income disparities, counterfeit and substandard products, food safety concerns, inconsistent service quality, and a lack of trust in the consumer market. These elements all constrain consumption. Today, I've highlighted the three most critical barriers. China cannot become a consumer nation unless the Communist Party dissolves and the Chinese society is fundamentally restructured. Only then is there hope. Thank you so much for watching. If you find this video helpful, please like it, drop a comment below, and hit the subscribe button right here. It really helps I'll be back with more content soon. Until then, be well.