Sheng Songcheng: Consumption will play a more important role in economic growth this year.

Sheng Song became the director of the China Chief Economist Forum Research Institute and a professor at the China Europe International Business School. This article is a transcript of Sheng Song's speech at the 2025 China Chief Economist Forum Annual Meeting. The Central Political Bureau meeting and Economic Work Conference held in December for the first time proposed to "vigorously boost consumption, improve investment efficiency, and comprehensively expand domestic demand," and to put consumption before investment. I think this is a remarkable and milestone statement. This indicates that we have basically unified our understanding at the policy level, affirming the important significance of consumption to economic stability and development. Of course, investment is also crucial, and we need to improve investment efficiency. The "comprehensive expansion of domestic demand" includes both investment demand and consumption demand. The meeting also mentioned "implementing a special action to boost consumption, promoting income growth and reduction of burdens for middle-and-low-income groups," because the middle-and-low-income groups are the main force of our consumption demand. "Enhancing consumption capacity and willingness"; "moderately increasing basic pension for retirees," which refers to retired individuals; and at the same time, "increasing basic pension for urban and rural residents," which concerns those who have not yet retired, helping to stabilize expectations and promote both current and future consumption. We need to increase the financial subsidies for urban and rural residents' medical insurance and vigorously implement the "two new" policies. The "two new" policies include the trade-in of old goods for new ones. We need to innovate diverse consumption scenarios and expand service consumption. Currently, service consumption is one of the most potential areas in our country. We need to "promote the development of cultural tourism," "actively develop the first issue economy, ice and snow economy, and silver-haired economy," which will be the future consumption scenes and trends. First of all, I want to say that consumption and investment are not mutually exclusive. About two years ago, I published an article titled "Consumption and Investment are not mutually exclusive." Last year, I also published an article of nearly 20,000 words discussing the mutual promotion and virtuous cycle of consumption and investment. In fact, in a series of speeches and papers, I have always emphasized the importance of promoting consumption to our country's current economic development. Why is this? Because in reality, consumption and investment are not separate but complementary, even mutually reinforcing. Consumption drives production, production drives investment, and the economy functions in a cycle like this. We often see inefficient investments, but there is no such thing as inefficient consumption. Moreover, consumption demand is more effective, direct, and reflective of social life and technological progress. It forms new productivity, so consumption plays a crucial role in economic development. However, our consumption level is currently significantly low. According to calculations using World Bank data, looking at the average consumption rate from ten representative countries globally (whose GDP accounts for about 63% of the global total), when per capita GDP is in the range of $10,000 to $15,000, the consumption rate reaches 73.22%. Currently, our per capita GDP is in this range (China's per capita GDP was $13,000 in 2023), but the consumption rate is only 55.6%. This indicates that our consumption rate is much lower than the global average level, and there is still significant room for improvement. Secondly, increasing income is key to promoting current consumption. In recent years, the growth rate of income in the household sector in China has slowed down. As we all know, an increase in consumption requires income and a stable expectation for the future; otherwise, consumption is hard to increase. According to the data from the National Bureau of Statistics, the average annual wage increase for urban private sector employees in China decreased from over 9,400 yuan in 2021 to 6,669 yuan in 2023. This means that although wages are increasing, the rate of increase is decreasing, and by 2023, the wage increase has fallen back to the level of 2017. At the same time, the leverage ratio of the household sector in China continues to rise. The household sector leverage ratio is the ratio of household sector debt to GDP. In 2020, the household sector leverage ratio in China reached 62.3%, exceeding the proportion of the household sector in the primary distribution, which was 62.2%. By the third quarter of 2024, the household sector leverage ratio had risen to 63.2%. The household sector's debt is mainly mortgage debt. As can be seen from the chart, the income share of the household sector in the primary distribution has hardly changed, staying at around 60%-65%. Yet the household sector's leverage ratio continues to rise rapidly, affecting the willingness and ability of individuals or the household sector to consume. Let's take a look at redistribution. The data shows that since 2000, the share of the total income of the household sector in the primary distribution has consistently been lower than the share of disposable income of the household sector, reflecting a relatively weak redistributive effect in China. Due to the fact that household sector transfer payments exceed income, after redistribution, the income share of the household sector is lower than in the primary distribution. In other words, the transfer adjustment to the household sector during redistribution is insufficient. Since disposable income - the income after redistribution - is what really matters to us, if after redistribution, the income share of the household sector is even lower, the consumption capacity and willingness of individuals will be impacted. Thirdly, fiscal and monetary policies should lean toward consumption. I want to make several suggestions. First, we should pay more attention to service consumption. Service consumption is a weak link in our economy but also a driving force for future economic development and consumption growth, effectively promoting employment and income growth. Currently, service consumption accounts for 52% of household consumption in China, while the US is at about 65%. In the US, the service industry (the tertiary industry) accounts for approximately 82% of GDP, and the service industry's employed population accounts for about 85% of the total workforce in the US. One major issue we face is employment, so supporting the development of the service industry is crucial - it can promote employment and improve people's lives, thereby promoting economic stability and development. Specifically, areas such as elderly care, childcare, and so on, I won't go into detail here, as it's widely understood. I suggest further leveraging structural monetary policy tools such as inclusive elder care special bonds. China has made fairly extensive use of structural monetary policy tools, with these tools accounting for a significant portion of the central bank's tools. These are my suggestions and observations on the importance of increasing consumption in driving economic development. Thank you.Around 15% of the total assets of the bank (sometimes exceeding 17%) include support for technological innovation, consumer support, and support for the real estate sector, among others. Just to give an example, there is the inclusive pension special refinancing, which is also a structural monetary policy. Other countries may not have such structural monetary policies like this, which is a prominent feature of our country and I think it also meets our needs.Next, I would like to say that in order to increase the share of household income and promote consumption, my suggestion is to increase the income of specific groups, mainly low-income individuals, as this group has a high marginal consumption tendency and needs more support. Our country has already begun to research and take action in this area. I suggest extending subsidies to groups such as infants, toddlers, and families with multiple children. In addition, increasing social security subsidies could also be considered. Finally, I want to emphasize the role of finance in supporting consumption. There is still room for improvement in non-mortgage loans for Chinese residents. According to data, in 2023, the ratio of non-housing consumer loans to household debt in China is 24.7%, while the United States has long maintained around 30%. Financial institutions can leverage their advantage in big data, innovate financial products, and explore key scenarios and customer potential. In conclusion, consumption will play a more important role in the development of the Chinese economy in the coming years. Especially now that there is already a unified understanding in the academic and policy circles, we are beginning to emphasize using consumption to drive and promote economic development and improve people's lives.