Sun Liping on Domestic Demand

Sun Liping, “Three Views of the Domestic Demand Question”[1]
 
Introduction and Translation by David Ownby
 
Introduction
 
Sun Liping (b. 1953) is a well known Chinese sociologist who retired fairly recently from Tsinghua University.  He is a frequent blogger with a large following, and I have translated many of his posts for this site.  As noted, his general pose is as a “truth-teller,” not someone who “speaks truth to power” necessarily (although his posts are occasionally taken down), but someone who says out loud what lots of people are thinking, on important contemporary issues like Russia, the war in Ukraine, the coronavirus, and China’s impending demographic crisis.
 
In the text translated here, he continues his discussion of the Chinese economy after the trials of the coronavirus pandemic, and is worth reading because he is the kind of retired sociologist who has a lot of friends in the business world and gives lectures at business schools.  In addition, increasing China's domestic demand was a major theme of the December Central Economic Work Conference, part of getting China's economy back on track.  Sun's observation here is simple:  China has nowhere near the domestic demand necessary to consume its productive capacity, which will be a huge, long-term problem for China now that decoupling seems to be occurring with the dialing back of globalization.  Needless to say, Sun is one of many Chinese liberals who feel that China has played its hand badly—even recklessly—on the international stage, putting China’s economy at risk for the dubious nationalistic pleasures of Wolf Warrior diplomacy. 
 
Translation
 
A few days ago, our WeChat group had a chat about whether consumption would recover after the epidemic dies down, because this is something that is of great concern to many friends in business.
 
At the time, I shared my view, which is that demand for necessities will gradually return to the normal level, because these are things that people need; demand for enjoying spontaneous pleasures will probably bounce back, but the rebound may not last too long; and demand for durable consumer goods will be in a long-term slump.
 
So my overarching judgement is that the consumption situation is quite serious, and as long as the problem of consumption is not resolved, then no matter how much more we invest and produce will not make any difference. But what is the crux of the consumption problem? I want to talk about three related issues.
 
First, people are spending money like crazy, but domestic demand is still insufficient
 
The problem of consumption and domestic demand is an old one, which we started to talk about in the late 1990s. At the time, we said that Chinese people have a habit of saving, and prefer saving money to spending it.  More recently, people say that this may be the case for the elderly, but that young people are now happy consumers.  My point here is that while culture is an important factor influencing people's consumption behavior, it is not a pivotal reason as far as China's lack of domestic demand is concerned.
 
We can take at look at how our consumption patterns have evolved over the years. It was in the late 1990s that telephones started to appear in everyone’s homes.  How much was the initial installation cost of a telephone at the time? In Beijing, it was about 5,000 or 6,000 RMB (approx. 750 to 900 USD). In other small and medium-sized cities, it was also roughly between 2,000 to 5,000 (approx. 300 to 750 RMB). And how much did people earn at that time? Only a few hundred RMB a month. In other words, you had to spend almost a year's salary to get a phone installed. This is the way the telephone spread throughout China. If people are willing to spend a year's salary for a telephone, can you really say they prefer saving over spending?

As for automobiles, they became something everyone could buy in the early part of the 21st century, especially after the SARS outbreak in late 2002. How much did cars cost at the time? The price of a basic Volkswagen Santana was about 150,000 or 160,000 RMB (approx 22,000 to 24,000 USD), which was roughly twice the price in the international market. At the time, the salary of a worker in China's cities and towns was some 2,000 to 3,000 RMB (approx. 300 to 450 USD) a month. This meant that it took four or five years of wages to buy a car, as well as giving up eating and drinking. This is how cars became popular in China. Can we really say that Chinese people do not like to spend money and prefer to save?

This is even more true of houses, which we all know, so I won't go into details. Therefore, if we say that Chinese people are too frugal, too thrifty, too committed to saving, this is not the case, even if we are only talking about the older generation. The fact is, the people are spending money like crazy, but domestic demand is still insufficient.
​ 
Second, domestic demand is not driven by incentives, which will not change the insufficiency of domestic demand
 
This is indeed the huge problem in today’s China. What is the root of the problem? I think that at the present moment, the most realistic factors are the following.
 
First, a considerable part of household expenditures has been tied up in epidemic control and prevention, which, as we know, is expensive.  The first thing we note is the large amount of government expenditure on this. Testing, quarantine facilities, vaccines, and setting up control teams all required large amounts of money. But people often overlook how much households have been spending and even wasting on this front. This includes stockpiling food, stockpiling medicine, as well as many other items that would not normally be necessary but now are. Some say that the epidemic has dampened consumption and demand, but this is not accurate. Many families are not spending less, but the money goes to fight the epidemic and not to normal expenditures. Of course, it is correct to say that normal consumption has been reduced and demand for those goods has diminished. But let’s be clear that household expenses have not been reduced.
 
Second, the income of a considerable part of the population has fallen. I can only say a considerable part here, because some people’s income does not decline no matter what. And statistics show that the household income is still increasing. Under the impact of the epidemic and other factors, the number of unemployed people in China has increased sharply in recent years, and some figures show that it now exceeds 70 million. Add to that the college graduates who graduated in the summer, and the unemployed population may have be greater than 80 million.
 
In addition, a considerable number of small and medium-sized enterprises, especially individual or household businesses, have been hit hard by the epidemic. A great many of these have gone bankrupt and closed down. Some of these still have to pay their mortgage and car loans. For this group, it is not at all a question of not wanting to consume, but instead not being able to consume.
 
Third, future previsions look bleak. Are there people with money in the bank who are not spending it? Of course there are. Last summer, I visited the business department of a bank and asked an employee whether business was off because of the impact of the epidemic. The employee replied that this year has been especially busy, busier than in previous years. It turned out that there were more people coming to the counter to make deposits. But we all know that the vast majority of people who come to the bank to deposit money are elderly people. Is it because their income has increased? Surely not. The reason is obvious, and is that their expectations of the future have soured, so they are putting more money aside for a rainy day.
 
All of this tells us that incentives do not work on domestic demand; domestic demand must be cultivated and nourished. To really solve the problem of domestic demand, we need to find ways to genuinely reassure people about the future, we need to genuinely increase their income, and we need to genuinely protect the people's wealth, so that a virtuous cycle can be formed between economic growth and the people's livelihood.
 
Third, China's current production capacity cannot be absorbed by domestic demand alone
 
Recently, I have been stressing that China's production capacity as the world's factory in the era of globalization greatly exceeds our normal domestic demand. This means that China's current production capacity cannot be absorbed by domestic demand alone. The problem now is that globalization is being reversed, leading to a major dismantling of supply chains. True enough, our supply chains are in many ways the most complete, and the quality of our industrial workers is also very good, but the problem is what to do with the products this huge capacity puts out?
 
Let's talk about the products that are most closely related to people's daily lives. Global annual shoe production is currently about 15 billion pairs. Among them, China produces 10.6 billion pairs, almost two-thirds. But in terms of consumption, China's annual consumption of shoes is 2.4 billion pairs. In other words, China produces 8 billion pairs of shoes for the world market each year. Looking at home appliances, China’s production of major products such as refrigerators, air conditioners, and washing machines accounts for about 50% or more of what the world produces, while China's population accounts is only 17% of world population. Is there any way domestic demand can consume this much?
 
So, it is true that we are trying to grow domestic demand. But we should also realize that even when domestic demand returns to normal, it cannot possibly absorb our existing production capacity. In this case, there are only two possible solutions: one is to completely change our economic structure, and the other is to continue to adhere to the line of reform and opening up, and truly integrate into the international economic order and the world market.
 
Notes

[1]孙立平, “关于内需问题的三点看法,” posted on Sun’s WeChat feed on December 12, 2022.