China's $41 billion plan to boost consumption is just the beginning as deflationary pressures mount. Economists are calling for a structural overhaul of the income distribution system, CNBC reported. In addition, it is noted that China's latest move to increase consumption is not aimed at increasing all types of spending.
Recall that last week the authorities doubled subsidies for the consumer program to 300 billion RMB ($41.47 billion) this year, in line with market expectations. The subsidies will amount to 15% to 20% of the purchase price of some products, including mid-class smartphones and home appliances.
It's an expansion of last year's 150 billion RMB program, announced over the summer, to a narrower range of products.
The new round of subsidies is “quite substantial” and is likely to support retail sales, similar to how e-commerce companies saw sales of some products increase towards the end of last year.
Although there is skepticism that the effect of the one-time subsidy won't last long. More subsidy programs are likely to follow. “Aggressive” China's 5% GDP growth target and prioritization of consumption indicate that Beijing will do more to support economic growth without relying on the old infrastructure spending scheme.
And while Beijing has not followed the U.S. or other countries in handing out cash to the public, Chinese policymakers increasingly recognize the need to counter deflationary pressures at home. If prices are too low, it becomes difficult to incentivize businesses to invest and increase consumer incomes. But once businesses feel more confident, they can hire more people and raise wages. That's why China's premier pledged at a high-level meeting last week to do more to promote income growth and ease the financial burden on low- and middle-income groups.
