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Scholars and policymakers in China have not yet reached a consensus on whether stimulating consumption is the top priority for the Chinese economy at the moment. Some economists argue more about the need to boost growth by expanding investment, as they believe that stable investment will be the fastest way to encourage economic expansion.
My understanding is that competent policymaking departments and economists need to better realize and identify the importance of boosting consumption. Under China’s 20 years of stabilizing investment through infrastructure construction, it is necessary to completely change such concepts and realize the significance of encouraging consumption. There is still a lot of work to be done on this front. If this year’s policy is still the same as last year’s and the year before, it will affect growth stabilization performance in 2023.
What makes stimulating consumption for growth so important? The main reason behind it is that China’s economic structure has changed. In normal situations, consumption contributes about 65 percent of GDP growth in China. Therefore, as the proportion of fiscal funds spent to stabilize growth conforms to the economic structure, roughly 65 percent of fiscal funds are used to stabilize consumption, and the remaining 35 percent are put toward stabilizing investment. Yet, in practice, most of the fiscal funds are used to stabilize investment. This disrupts the overall growth structure.
With China’s economy developing and upgrading rapidly, consumption has now become the core factor in economic growth. The country has moved beyond the stage of 20 years of rapid urbanization and rapid industrialization, and infrastructure investment has been oversaturated. Therefore, if the method of stabilizing investment is once again applied to stabilize growth, it will seriously distort the driving force of China’s economic growth. However, I think such understanding has not yet been widely recognized by economists and policymakers, and therefore, further study on this matter is needed.
China’s previous strategy of stabilizing investment has caused distortions in the overall fiscal expenditure structure. Last year, China’s total GDP reached 114 trillion yuan ($16.2 trillion). The total amount of investment in fixed assets was 55 trillion yuan, while fixed-asset investment accounted for 48 percent of GDP. In comparison, in developed countries such as the United States, Australia, Japan and European nations, the annual total investment in fixed assets accounts for only about 20 percent of the country’s GDP.Long-term distorted structure caused by China’s large proportion of fixed asset investment in GDP is unsustainable.
I would argue that if the current economic structure is corrected and adjusted in the next 10 years, investment in fixed assets will drop from 55 trillion yuan to 30-40 trillion yuan and then decline further. Its high growth will undoubtedly crowd out consumption in the economy, and have a negative impact.
Here are some ways to boost consumption:
First, efforts should be made to promote consumption in terms of raising incomes, instead of working from the production standpoint. Since 2020, in Europe and the United States, the key measure to stabilize consumption has been to issue consumption vouchers to residents, and this has generated a notable effect in boosting the economy. If people’s disposable incomes decline, consumption will definitely drop. Therefore, efforts must be made to find a way to increase disposable income of Chinese consumers. However, if we talk about increasing disposable incomes and only work on stabilizing employment, it would not be sustainable over the long term. It is a long-term policy to stabilize employment as well as improve the social security system, medical system and education system, whatever the circumstances are. The core of stabilizing consumption is to increase household incomes. One way to bring this about is to increase current incomes; that is, issue consumption vouchers or money to residents. It is the correct way to stabilize consumption from the income side. Another way of effecting this is to increase investment income, such as making the stock market more prosperous, so that everyone makes money, thus leading to higher consumption.
Second, efforts should be made to increase the public’s marginal propensity to consume by cutting interest rates. The best way to increase the marginal propensity to consume in the short term is, in fact, by reducing interest rates, which frees up credit. The two methods for stabilizing consumption in Europe and the US in 2020 were distribution of money and lowering of interest rates. By raising incomes through distribution of money and lowering of interest rates, it is possible to increase the general public’s marginal propensity to consume. People’s incomes are divided into two parts. One part is used for saving and the other part is used for consumption. When savings increase, consumption decreases. Savings are closely related and very responsive to interest rate changes. When Europe and the US faced economic downturn pressure in 2020 and wanted to stabilize consumption, they once lowered interest rates to zero or even negative. But China seems to be more conservative with regards to cutting interest rates.
There are many reasons for China to be shy about cutting interest rates. These include the need to prevent real estate bubbles, avoid a stock market sell-off, safeguard against rampant inflation, and stabilize the RMB exchange rate. The goal of monetary policy is complicated and has many facets. It needs to work not only to maintain economic growth, but also to stabilize prices, support the capital market, undergird the housing market and stabilize the exchange rate. Currently, in terms of the stock market, the Chinese bourse has a flat performance during the past 10 years, and share prices of many listed companies have fallen to historic lows. A rise in the stock market can increase investment income and benefit consumption. In terms of prices, China’s producer price index has entered negative growth since October. Currently, we do not have serious inflation, so from the perspective of prices, cutting interest rates will also work. In terms of the RMB exchange rate, now that the appreciation of the US dollar has ended and interest rate hikes outside China have slowed, the pressure of RMB appreciation is gradually picking up. Therefore, to increase the public’s marginal propensity to consume and to stabilize consumption, we should cut interest rates.
In addition, it is also very important to boost consumption by creating consumption scenarios with engaging consumption activities, where consumers can truly interact with shops and products. If consumers cannot have such interactions, contact consumption in many scenarios will not be realized. This involves the impact of COVID-19 and how to contain the pandemic in a science-based, accurate way, instead of a one-size-fits-all approach.
To sum up, only by realizing the importance of consumption and work on the income front, cutting interest rates and creating more engaging scenarios for consumption can the Chinese economy likely see a rebound in the first quarter of next year.
The views don’t necessarily reflect those of China Daily.
The author is the director of the Wanbo New Economic Research Institute.
You might not think it’s possible to outperform the average Wall Street professional with just a single investment. Fund managers are highly educated and steeped in market data. They get paid a lot of money to make smart investments.
But the truth is, most of them may not be worth the money. With the right steps, individual investors can outperform the majority of active large-cap mutual fund managers over the long run. You don’t need a doctorate or MBA, and you certainly don’t need to follow the everyday goings-on in the stock market. You just need to buy a single investment and hold it forever.
That’s because 88% of active large-cap fund managers have underperformed the S&P 500 index over the last 15 years thru Dec. 31, 2023, according to S&P Global’s most recent SPIVA (S&P Indices Versus Active) scorecard. So if you buy a simple S&P 500 index fund like the Vanguard S&P 500 ETF (NYSEMKT: VOO), chances are that your investment will outperform the average active mutual fund in the long run.
It’s a good bet that the average fund manager is hardworking and well-trained. But there are at least two big factors working against active fund managers.
The first is that institutional investors make up roughly 80% of all trading in the U.S. stock market — far higher than it was years ago when retail investors dominated the market. That means a professional investor is mostly trading shares with another manager who is also very knowledgeable, making it much harder to gain an edge and outperform the benchmark index.
The more basic problem, though, is that fund managers don’t just need to outperform their benchmark index. They need to beat the index by a wide enough margin to justify the fees they charge. And that reduces the odds that any given large-cap fund manager will be able to outperform an S&P 500 index fund by a significant amount.
The SPIVA scorecard found that just 40% of large-cap fund managers outperformed the S&P 500 in 2023 once you factor in fees. So if the odds of outperforming fall to 40-60 for a single year, you can see how the odds of beating the index consistently over the long run could go way down.
Warren Buffett is one of the smartest investors around, and he can’t think of a single better investment than an S&P 500 index fund. He recommends it even above his own company, Berkshire Hathaway.
In his 2016 letter to shareholders, Buffett shared a rough calculation that the search for superior investment advice had cost investors, in aggregate, $100 billion over the previous decade relative to investing in a simple index fund.
Even Berkshire Hathaway holds two small positions in S&P 500 index funds. You’ll find shares of the Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) in Berkshire’s quarterly disclosures. Both are great options for index investors, offering low expense ratios and low tracking errors (a measure of how closely an ETF price follows the underlying index). There are plenty of other solid index funds you could buy, but either of the above is an excellent option as a starting point.
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The numbers from the Department of Finance suggest they have struck taxation gold. But they’ve been wrong before
Published Apr 19, 2024 • Last updated 8 hours ago • 5 minute read
“99.87 per cent of Canadians will not pay a cent more,” the prime minister said this week, in reference to the budget announcement that his government will raise the inclusion rate on capital gains tax in June.
The move will be limited to 40,000 wealthy taxpayers. “We’re going to make them pay a little bit more,” Justin Trudeau said.
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But it’s hard to see how that number can be true when the budget document also says 307,000 corporations will also be caught in the dragnet that raises the inclusion rate on capital gains to 66 per cent from 50 per cent.
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Many of those corporations are holding companies set up by professionals and small-business owners who are relying on their portfolios for their retirement.
The budget offers the example of the nurse earning $70,000 who faces a combined federal-provincial marginal rate of 29.7 per cent on his or her income. “In comparison, a wealthy individual in Ontario with $1 million in income would face a marginal rate of 26.86 per cent on their capital gain,” it says.
Policy wonks argue that the change improves the efficiency and equity of the tax system, meaning capital gains are now taxed at a similar level to dividends, interest and paid income. The Department of Finance is an enthusiastic supporter of this view, which should have set alarm bells ringing on the political side.
That’s not to say it’s not a valid argument. But against it you could put forward the counterpoint that capital gains tax is a form of double taxation, the income having already been taxed at the individual and corporate level, which explains why the inclusion rate is not 100 per cent.
The prospect of capital gains is an incentive to invest particularly for people who, unlike wage earners, usually do not have pensions or other employment benefits.
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That was recognized by Bill Morneau, Trudeau’s former finance minister, who said increasing the capital gains rate was proposed when he was in politics but he resisted the proposal.
Morneau criticized the new tax hike as “a disincentive for investment … I don’t think there’s any way to sugar-coat it.”
Regardless of the high-minded policy explanations that are advanced about neutrality in the tax system, it is clear that the impetus for the tax increase was the need to raise revenues by a government with a spending addiction, and to engage in wedge politics for one with a popularity problem.
The most pressing question right now is: how many people are affected — or, just as importantly, think they might be affected?
One recent Leger poll said 78 per cent of Canadians would support a new tax on people with wealth over $10 million.
But what about those regular folks who stand to make a once-in-a-lifetime windfall by selling the family cottage? We will need to wait a few weeks before it becomes clear how many people feel they might be affected.
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The numbers supplied to Trudeau by the Department of Finance suggest they have struck taxation gold: plucking the largest amount of feathers ($21.9 billion in new revenues over five years) with the least amount of hissing (impacting just 0.13 per cent of taxpayers).
The worry for Trudeau and Finance Minister Chrystia Freeland is that Finance has been wrong before.
Political veterans recall former Conservative finance minister Jim Flaherty’s volte face in 2007, when he was forced to drop a proposal to cancel the ability of Canadian companies to deduct the interest costs on money they borrowed to expand abroad.
“Tax officials vastly underestimated the number of taxpayers affected when it came to corporations,” said one person who was there, pointing out that such miscalculations tend to happen when Finance has been pushing a particular policy for years.
Trudeau’s government has some experience of this phenomenon, having been obliged to reverse itself after introducing a range of measures in 2017, aimed at dissuading professionals from incorporating in order to pay less tax. It was a defensible public policy objective but the blowback from small-business owners and professionals who felt they were unfairly being labelled tax cheats precipitated an ignoble retreat.
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Speaking after the budget was delivered, Freeland was unperturbed about the prospect of blowback. “No one likes to pay more tax, even — or perhaps more particularly — those who can afford it the most,” she said.
She’d best hope such sanguinity is justified: failure to raise the promised sums will blow a hole in her budget and cut loose her fiscal anchors of declining deficits and a tumbling debt-to-GDP ratio.
That probably won’t be apparent for a year or so: the government projected that $6.9 billion in capital gains revenue will be recorded this fiscal year, largely because the implementation date has been delayed until the end of June. We are likely to see a flood of transactions before then, so that investors can sell before the inclusion rate goes up.
After that, you can imagine asset sales will be minimized, particularly if the Conservatives promise to lower the rate again (though on that front, it was noticeable that during question period this week, not one Conservative raised the new $21 billion tax hike).
The calculated nature of the timing is in line with the surreptitious nature of the narrative: presenting a blatant revenue grab as a principled fight for “fairness.” The move has the added attraction of inflicting pain on the highest earners, a desirable end in itself for an ultra-progressive government that views wealth creation as a wrong that should be punished.
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Trudeau’s biggest problem is that not many voters still associate him with principles, particularly after he sold out his own climate policy with the home heating oil exemption.
The tax hike smacks of a shift inspired by polling that indicates that Canadians prefer that any new taxes only affect the people richer than them.
Success or failure may depend on the number of unaffected Canadians being close to the 99.87-per-cent number supplied by the Finance Department.
History suggests that may be a shaky foundation on which to build a budget.
National Post
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