Mao Zedong believed that the Chinese Communist Party's true power came from the people. In an attempt to increase consumption, the People's Republic is now looking to its modest beginnings. Nevertheless, it is unclear whether these measures would produce the rapid growth that investors and authorities desire.
When China's top decision-making body, the Politburo, met on Tuesday to determine the objectives for the remaining half of the year in order to fulfill its target of about 5% GDP growth by 2024, Beijing once again demonstrated the urgency of reviving the $17 trillion economy. Significantly, according to a meeting summary released by the official news agency Xinhua, it advocated for measures that would raise earnings and improve the "capacity and willingness" of lower- and middle-income people to spend. There are more than 500 million members of the Chinese middle class, according to figures from a different state-run publication.
Although there aren't enough details, the general idea is sensible. A possible solution to encourage savers to spend more would be to increase the minimum salary, which in Shanghai is 2,690 yuan and in Lhasa is as low as 1,650 yuan ($228). At the same time, representatives made vague allusions to greater taxes on a wider array of luxuries for the wealthy during the most recent Third Plenum meeting. When combined, those measures might promote domestic spending while providing more reliable revenue streams for local governments that are struggling financially.
However, it will take some time for these improvements to take effect. Beijing is taking the lead in an extensive economic shift away from its development strategy centered on investments. To do that, the government would need to give households access to more state resources. For example, the government might invest more in affordable housing, pensions, and care for the elderly and children rather than flooding the market with cash for massive infrastructure projects.
Still, the present slump remains the top issue in the second-biggest economy in the world. Retail sales and imports underperformed industrial output and exports in the second quarter, causing growth to decelerate to a worse-than-expected 4.7%. To this end, the fiscal heavy lifting will continue to fall on the central government. First, in order to finance affordable housing initiatives, it will likely need to provide local governments with increased financial support. Beijing will have to let its pocketbook hang open until the people do.