China sees reducing inequality to boost the economy

Photographer: Qilai Shen / Bloomberg

The Chinese Communist Party’s new promise to fix the “demand side” of the economy has raised expectations that the leadership will implement more egalitarian policies to stimulate consumer spending.

The main party leaders used the phrase “demand side reform” for the first time this month, in a departure from its earlier focus on “supply side” changes that involve modernizing the industry and cutting capacity in bloated sectors.

Although China is the only major economy that is expected to grow this year due to its effective control of the pandemic, the new slogan signals that the ruling party is concerned about the uneven recovery in which household spending has lagged behind investments in real estate and infrastructure . Beijing did not elaborate on what the phrase meant, but officials gave suggestions and economists were quick to offer suggestions.

Worker participation stagnates

Attempts to rebalance the economy have yet to bear fruit

Source: Sources: University of Groningen, University of California, Davis, via the Federal Reserve Bank of St Louis FRED database


Income redistribution

The term “demand side” is used to refer to investments, consumer spending and any trade surplus. Beijing turned to investment to replace exports as a driver of economic growth during the 2008 financial crisis, when orders abroad slowed and, since then, has struggled to “rebalance” demand in relation to consumer spending.

Economists attribute this imbalance to a number of factors, including wage inequality which means that income accrues to wealthier families who are less likely to spend, and the relatively high share of gross domestic product paid as profits to capital owners, rather than wages to workers.

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