MNI EXCLUSIVE: China's 5-Year Plan To Boost Domestic Demand

China will have to cut income tax and boost social spending if it is to achieve the goals of boosting domestic demand and reducing dependence on exports set to be the centrepiece of the next five-year plan, advisors and government sources told MNI, although others in policy circles insist it is too early to abandon the investment-led model that has transformed the country.

Moves to promote a domestic-centred economy will be included in the five-year plan for 2021-25 being prepared for party approval in October, people familiar with the matter said, with the full document being made public towards the end of 2020. This shift in focus will be central to the so-called "dual circulation" economic model unveiled by Chinese President Xi Jinping at the Communist Party's decision-making meeting earlier this month.

The domestic economy should account for 65% to 70% of GDP by 2035, Zhang Jianping, the director of the Center for Regional Economic Cooperation Chinese Academy of International Trade and Economic Cooperation under China's Ministry of Commerce, told MNI. That would compare with 55% today.

CUT TAXES

Cuts in income tax rates and increases in taxation thresholds to boost the middle class who are key drivers of domestic consumption will be discussed at next year's National People's Congress, according to Chen Xian, a professor at Antai College of Economics and Management at Shanghai Jiaotong University. The government and most economists also oppose further large-scale stimulus to boost investment, said Chen, also an advisor to Shanghai government.

Not all influential voices are in agreement. Yu Yongding, a member of the Chinese Academy of Social Sciences and a former member of the People's Bank of China's monetary policy committee, told MNI that investment would by necessity remain the driver of the economy for some years to come. Boosting the incomes of lower- and middle-earners would only prompt them to rebuild savings depleted during the pandemic, Yu said.

"So you can hardly expect consumption to drive economic growth this year," he said.

But Liu Shijin, a former director of the Development Research Center of the State Council, said policymakers should seek to double the size of China's middle-income group, which currently includes about 400 million people, or 30% of the population.

BOOST BENEFITS

Other priorities include strengthening physical infrastructure around the main metropolitan centres such as Beijing and Shanghai, and boosting social security, expanding it to cover the 236 million migrant workers, mainly from rural areas, who cannot access such services in the cities where they work, according to Lu Ming, a professor at Shanghai Jiaotong University who attended the recent economic policy consulting meeting chaired by President Xi.

Currently much of migrant workers' income is eaten up by basic needs such as medical care and saving for retirement, leaving them with little disposable income.

"A non-local resident's consumption is usually 16% to 20% lower than a resident if other conditions remain the same. If cities can assimilate those non-local residents, that part of the consumption power can be released," Lu said, in remarks also echoed by Zhang.

Another way to boost domestic demand would be improving infrastructure such as urban railways and public schools in the outskirts of China's big cities, Lu said.

"Public services and infrastructure must adapt to the growing demands of the people," he said.