China looks at cutting inequality in order to boost economy

25 December, 2020 12:00 AM printer

BEIJING: The Chinese Communist Party's new pledge to fix the "demand side" of the economy has prompted expectations the leadership will implement more egalitarian policies to stimulate consumer spending.

The Party's top leaders used the phrase "demand-side reform" for the first time this month, in a departure from its past focus on "supply-side" changes which involve upgrading industry and cutting capacity in bloated sectors.

Although China is the only major economy set to grow this year due to its effective control of the pandemic, the new slogan signals that the ruling party is worried about the uneven recovery in which household spending has lagged behind investment in real estate and infrastructure.

Beijing has not detailed what the phrase means, but officials have dropped hints and economists have been quick to offer suggestions.

The term "demand side" is used to refer to investment, 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 overseas orders slowed, and has since struggled to "rebalance" demand toward consumer spending.

Economists blame that imbalance on several factors, including pay inequality that means income accrues to richer households who are less likely to spend, and the relatively high share of gross domestic product paid as profits to capital owners rather than as wages to workers.

Top officials including President Xi Jinping and Vice Premier Liu He and have drawn attention to those issues this year.

In a speech published in August, Mr Xi spoke about the low share of wages in GDP and "outstanding problems in income distribution" and cited French economist Thomas Piketty's "Capital in the 21st Century," as showing the harmful effects of inequality. Mr Liu has called for improving mechanisms to increase wages.