Eight levers to boost China's consumption: Fan Gang

The Chinese Academy of Social Sciences prof. focus on: take-home pay; safety net; targeted, time-limited incentives; wealth effects; imputed rent; services pivot; paradox of thrift; consumer finance.

Fan Gang is the President of China Development Institute, one of National High-end Think Tanks in China; Professor at the Graduate School of Chinese Academy of Social Sciences (CASS) and at the Peking University HSBC Business School. He was previously a member of the Monetary Policy Committee of the People's Bank of China.

Between 1985 and 1987, Prof. Fan served as a visiting fellow at the National Bureau of Economic Research (NBER) and Harvard University in the United States. He then earned his Ph.D. from the Chinese Academy of Social Sciences in 1988.

Prof. Fan delivered a speech at Boao Real Estate Forum 2025. The yearly forum, initiated by the "Guandian Organization 观点" in 2001, focuses on China's real estate market development. Prof. Fan, in fact, is among the very few who have attended the forum every year for the past 25 years. This newsletter also published his speech in 2024.

In his speech this year, titled "Boosting Consumption and Stabilizing Macroeconomic Growth提振消费与宏观经济稳增长," Prof. Fan largely echoes a now familiar diagnosis: China's near-term constraint is demand, not supply. Household consumption is about 40% of GDP (roughly 55% including government), well below common comparators, so the bottleneck is market absorption rather than capacity.

He organizes his argument around eight levers that lift consumption.

1. Wages and disposable income. Tax design matters because spending follows take-home pay.

2. Life-cycle behavior. Stronger social security lowers precautionary saving and raises current spending.

3. Permanent-income logic. One-off vouchers rarely shift behavior unless tightly targeted and time-limited (e.g., trade-in schemes).

4. Wealth effects. Housing and equities shape perceived lifetime resources and therefore consumption.

5. Housing as consumption. Properly accounting for imputed rent would show higher consumption (and therefore, GDP) than current methods suggest.

6. Rotation towards services. Goods capacity is ample, while healthcare, eldercare, culture, entertainment and tourism have room to grow.

7. The paradox of thrift. Universal belt-tightening suppresses aggregate demand.

8. Consumer finance — expand prudently; risks exist, but overall penetration remains modest.

Below is a full translation of his speech, and all the words in bold are added by me. The translation has not been reviewed by Fan.

提振消费与宏观经济稳增长

Boosting Consumption and Stabilizing Macroeconomic Growth

It's a great pleasure to join the Boao Real Estate Forum again. In fact, among all of us here today, only Ms. Chen Shitao and I have attended every single forum for the past 25 years.

When I speak here, I usually discuss macroeconomic trends. But this year, I want to zero in on a key challenge, the lack of demand, which is now the biggest drag on the Chinese economy. Demand has two main drivers: investment and consumption. Historically, China's economy has struggled with weak consumption demand. And now, as production capacity grows rapidly, this imbalance has become even more pronounced. So today, I'd like to focus on the issue of consumption demand.

How do we measure consumption demand compared with other countries? How do we quantify insufficient consumption? Not by absolute volume, but by proportion. Specifically, the share of consumption in GDP. This consumption-to-GDP ratio reflects the critical balance between spending and saving, and it's this very imbalance that exposes weak demand.

So what is China's consumption-to-GDP ratio? Currently, it's about 55% when including government consumption. Excluding government consumption (which accounts for about 15%), household consumption stands at just 40%. In contrast, this figure is 80% in the United States, and in several other developing countries, it ranges between 60% and 70%. China's consumption level, at only 40%, is significantly insufficient.

This is the first point: we need to recognize where the problem lies. Which theoretical framework addresses these issues? It is precisely macroeconomics. For a long time, China has believed that macroeconomics and macroeconomic policy are primarily about supply-side reforms and enhancing productivity. This has been Chinese way of thinking for many years, a mindset that, of course, originates from the era of scarcity. In the past, China experienced shortages of goods, insufficient productivity, limited production capacity, and underdeveloped technology. Consequently, for many years, the focus has been on productivity and supply-side issues.

As several speakers mentioned earlier, everyone emphasizes that future growth must rely on increases in productivity, on the development of new quality productivity forces. This is correct: in the long run, growth inevitably depends on productivity gains and technological progress. These are long-term issues, which we should indeed continue to pursue over time. Yet, once productivity reaches a certain level, we inevitably encounter the problem of insufficient demand and the bottlenecks of the market.

Consider the experience of developed countries. In their early years, they were also poor. Poverty necessitated production, supply, and the enhancement of productivity. Only after these needs were met did the problem of insufficient demand begin to emerge. Of course, this deep issue is closely related to wealth inequality and the conflicts between wages and profits. But in any case, insufficient demand eventually arises, often leading to economic crises or even depressions. Early developed nations went through these very experiences and then had to look for markets and find ways to expand demand.

The methods they used to expand demand back then were very different from what we use today. At that time, they sometimes resorted to force, using warships to open foreign markets. After the show of military power, the next step was to sell goods.

You may recall that when European countries came to China, they noticed that the Chinese did not wear nightcaps, whereas Europeans did. They thought: if 400 million people each wore a nightcap, how huge would the demand be? I recently came across another example: it wasn't just nightcaps, back then, they even calculated that if every Chinese garment were one inch longer, the demand would be enormous. Enough to keep their factories running for several years.

Economic crises occurred every seven or eight years, and each was a crisis caused by overcapacity. Some occurred even every two or three years. In the 30 years following the 19th century, there was almost an economic crisis every two or three years. These crises were all caused by oversupply and excess capacity. By the 1930s, the Great Depression hit. I won't go into all the details of that period, but during the Great Depression, Keynesian macroeconomics emerged. A key proposition of Keynes's framework is the "demand-determined theory," and it was within this framework that modern macroeconomic theory took shape.

There are many different theoretical approaches to analyzing productivity. Microeconomics, growth theory, development economics, and study on total factor productivity or new quality productivity forces. These analyses are all valid, however, in macroeconomics, this entire discussion is condensed into a single concept: the potential growth rate, or what is sometimes called the "potential aggregate supply." This potential is simply there, it exists, but how much of it can actually be utilized and realized is determined by demand. Only when there is sufficient demand can this potential capacity be converted into actual output. This is precisely the relationship between aggregate supply and aggregate demand in a market economy.

Macroeconomics then begins to analyze the various factors that determine demand, particularly what drives consumption. Think about it: for those of you who have studied economics, or have taken EMBA or MBA courses, where are the theories about consumption? Microeconomics only discusses marginal choices among different goods, you eat a little more, wear a little more, travel a little more, live a little more. But where are the theories that explain the overall share of consumption, the consumption rate, or the savings rate? These questions belong to macroeconomics, because it studies aggregate demand and examines how the economy can realize its full productive capacity. This is the point I want to focus on today: I will give you an overview of the analyses of consumption within macroeconomics.

First, income is a primary determinant of consumption. The amount of income, especially wage income, directly shapes the level of consumption. In macroeconomics, there is a basic distinction: profits determine investment, because profits are continuously reinvested, while wages, or personal compensation, including dividends for business owners, form the foundation of consumption. In other words, the level of consumption depends on how much income people have, particularly wage income. Taxes play a crucial role here, because what ultimately determines consumption is disposable income. Whenever we study consumption, we are essentially studying the effects of taxation: higher taxes reduce disposable income, which in turn can lead to insufficient consumption.

Second, the life-cycle theory. Over the course of a person's life, they form expectations about their total income, and they plan to allocate that income across their lifetime. Life can be divided into two main stages: the working years, and the retirement years. During the working stage, people earn income and save, with the savings intended for the second stage, the retirement years, as a form of pension fund. The money saved during working years is called "savings," while the money spent during retirement is sometimes referred to as "dissaving", since it draws down previously accumulated savings.

This theory highlights the importance of social security systems. Recently, there has been much discussion about social security. I won't go into specific policy issues, but in any case, a well-functioning social security system helps increase current consumption. With fewer worries about the future, people can afford to save less and consume more today. Social security is therefore a key factor in determining the balance between savings and consumption rates.

Moreover, in a market economy, China cannot do without social security. It is fundamentally linked to issues of wealth inequality and social stability. Just how important is this? Many macroeconomists ultimately focus on social security, because even a small change in social security can have a significant impact on overall consumption.

This is why the silver economy has become so important today, it represents a significant consumer group. It is worth noting that much of China's past savings were government savings or state-owned savings. These savings have been transformed into substantial state-owned assets. A portion of these assets should, in fact, serve as pension funds accumulated from past savings. If China can utilize some of these state-owned assets to supplement pension funds, ensuring that retirement income reaches a relatively high level and covers a larger portion of the population, it would have a major stimulative effect on consumption demand. China should carefully consider how to make effective use of its state-owned assets so that they play a positive role in social development and in maintaining macroeconomic stability.

Third, another theory connecting income and consumption is the permanent income hypothesis. It suggests that people base their consumption not on temporary income, but on their expectations of long-term, stable income. For example, if I receive 1,000 yuan today and expect to receive the same amount every month or year in the future, I will treat it as permanent income and spend it accordingly. But if it is a one-time payment, say I win 1,000 yuan in the lottery, this is temporary income. A rational consumer would spread this money over their remaining lifetime, spending only a small portion each year.

What does this imply for policy? Issuing consumption vouchers or subsidies generally has limited effect on overall consumption. Only when such incentives are time-limited and tied to specific, non-essential products like upgrades to equipment or consumer goods might people spend them immediately. In times of economic downturn, many people will also draw on their savings to maintain a certain level of consumption. This has very meaningful implications for real-world economic policy.

Fourth, the wealth effect. This is another concept studied in macroeconomics. What is the wealth effect? Consider real estate prices. If someone owns two properties and believes that these assets will secure their retirement, they may feel confident enough to spend a bit more today. However, if the value of their wealth suddenly declines, say, due to falling property prices, they perceive a reduction in their future income and will likely cut back on consumption. Similarly, when the stock market performs well and people see their wealth increase, they tend to spend more. The wealth effect is therefore a crucial mechanism in macroeconomics for stimulating consumption.

Fifth, housing expenditure is also consumption. This is self-evident: for many people, spending on housing is likely the largest outlay in a lifetime, and one they cannot do without. The point here concerns how housing consumption is measured. In many countries' statistics, a large component is the imputed rental income from housing. If you own your home and do not rent it out, you are still effectively "consuming" the dwelling each month. The asset value of the property is wealth and is not part of GDP , whereas rent is part of GDP . Even if you do not lease the property to others, you consume it yourself — this is known as imputed rent, and it represents a substantial component of wealth.

Back when pilot work was carried out to calculate imputed rents, it is said that Shenzhen ran a trial, and the result came out to roughly about 7%–8% of GDP . On the one hand, it brought previously uncounted cash income into the accounts; in particular, once the imputed rent on owner-occupied housing was included, its share of GDP was much larger than it is now. There is still imputed rent in today's statistics, but it is not valued at current market prices; instead, it is calculated based on input (historical) costs, so the resulting figure is quite small. In our consumption statistics, we are therefore understating a portion of consumption, namely, housing consumption.

Sixth, goods consumption and services consumption. The current surplus lies mainly in goods consumption. Services consumption is also in surplus, with many service outlets now closing. Overall, at this stage of China's economic development, capacity for goods consumption is already excessive, while services consumption still has room to grow, especially in health care, elder care, entertainment, fashion, and tourism, across both public and private services. In the next phase, as urbanization expands, services consumption will become an important area underpinning consumption growth.

Seventh, the paradox of thrift. This is a topic always discussed by macroeconomists. Thrift is a virtue, but if everyone practices thrift, spending little, not consuming, with no one engaging in high or luxury consumption, demand will contract, which negatively affects the overall balance of supply and demand. This is called the paradox of thrift.

Eighth, consumer finance. This, too, is a macroeconomic issue, encompassing installment purchases, consumer credit, and related matters. People often say there are risks in this field. I would argue that risks always exist, but compared with other countries and with other types of lending, the risks here should be considered controllable, and the sector remains underdeveloped. Of course, the risks warrant vigilance. South Korea, for example, experienced a credit-card crisis: young people used a new credit card to pay the bill on an old one, the snowball kept rolling until it collapsed, and a financial crisis followed. Even so, we still have room to develop; on the whole, our use of credit cards remains insufficient.

In sum, how to bolster consumption is indeed a major macroeconomic question. This year may be the first year in which consumption has received sustained attention: starting with the Two Sessions and followed by a joint circular from the General Office of the CPC Central Committee and the General Office of the State Council that set out 30 measures to boost consumption. Arguably for the first time, strengthening consumption has been elevated to a strategic decision in macroeconomic policy.

Governments at all levels have also begun to act. In the past, few focused on consumption; when governments had funds, they subsidized firms, the supply side and productive capacity.

Now subsidies are starting to target consumption. Such subsidies matter: the government gives them to demand-side actors so they can spend and support the market, allowing the subsidy to pass through to the supply side, rather than giving it directly to the supply side when no one is buying the new products created by capacity expansion. If the government subsidizes demand and lets it transmit to the supply side, that forms a healthy cycle. Some local governments have begun doing so.

We are also recommending additional steps, including tax reforms and tax reductions, and even adjustments to the value-added tax regime, to shift the focus from the supply side to the demand side so that efforts to boost consumption are implemented in practice, embedded in government policy, and reflected across all links in market development.

China's economy now indeed faces various challenges. If the country follows economic laws — many of today's issues are those that advanced market economies experienced in their early years — draw on other countries' development experiences, think through these issues theoretically, and craft the right policies, then from this perspective China is still at an early stage of development. China therefore has substantial potential yet to be realized, and its potential aggregate supply can grow faster under the pull of demand.

That is all I have to share. Thank you. ■