China will promote the role of consumption in the economy and move away from its sole focus on investment, according to the central bank governor, ushering in a shift in the growth model that’s come to define the country over the past two decades.
“The priority of macroeconomic policy should shift from promoting more investment in the past, to promoting both consumption and investment, with more importance attached to consumption,” Pan Gongsheng said in a speech at the Asian Financial Forum in Hong Kong.
Pan made the comments Monday during an unexpected appearance at the event just as the People’s Bank of China issued a statement outlining new measures to defend the yuan, acting after the currency dropped close to a record low a week before Donald Trump reclaims the White House.
China will look to increase residents’ income, step up subsidy support for consumers and improve social security to boost consumption, Pan said, expanding on an argument he began to make public last fall.
The governor cited “insufficient domestic demand, especially consumption demand,” and “low price levels” among top domestic challenges for the world’s second-largest economy.
While China likely met its official growth target of around 5% for 2024, worries are mounting over the outlook for this year and beyond. Higher US tariffs threatened by Trump would diminish support from strong exports to the economy at a time when China is in the grip of persistent deflation, a reflection of depressed domestic demand and sluggish consumer and business confidence.
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At an annual policy meeting last month, top officials already pledged to make boosting consumption a top priority this year for only the second time in at least a decade.
Incremental steps
But they’ve taken limited steps so far, with a plan to expand a consumer trade-in program that provides discounts on purchases of home appliances and cars, while vowing to increase pension payouts and medical insurance subsidies. That will likely represent incremental efforts rather than a complete overhaul of the policy mix that still favors investment.
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China has in the past relied on capital spending to develop infrastructure, property and manufacturing to cushion the economy in periods of downturn. The result was a pile-up of debt, poor returns on investment and a worsening imbalance between supply and demand of goods.
Household spending — even counting goods and services provided to citizens by the government — accounts for only around 45% of gross domestic product, well below the 60%-80% level seen in most countries in the Organization for Economic Cooperation and Development.
Pan's appearance in Hong Kong was a surprise since he wasn’t listed as a speaker or guest on the event’s official program.
Apart from broader comments, the governor used the occasion to try to ease more immediate investor concerns, saying that risks in the property market have been mitigated as housing sales improved in recent months. Threats faced by local governments from “hidden debt” on their balance sheets are also receding, he said.
Pan reiterated the central bank will work to keep the yuan basically stable at a reasonable, equilibrium level, and that it will correct any pro-cyclical behavior in the foreign exchange market.
The PBOC has boosted its support of the yuan in recent weeks, including a warning and tweaks to its capital controls on Monday. Pan reiterated that the central bank will use tools including interest rates and the reserve requirement ratio to keep liquidity ample.
