China has repeatedly pledged to make the consumer sector a more prominent driver of economic growth but is yet to implement any structural policy changes to achieve this.
Analysts say potential costs in the trillions of dollars and risks that reform could bring instability are making officials wary of bold policy decisions.
Below are policy options for Beijing and some of the trade-offs involved:
WELFARE
The fastest way would be to significantly raise pensions, state sector wages, unemployment benefits and other perks. In the short-term this could be funded through debt issuance, but in the long-term fiscal space would need to be created through tax, land and other reforms.
TAX SYSTEM
Chinese leaders flagged plans for fiscal reforms in December 2023, but details are scarce.
China taxes capital gains at 20%, which is lower than the 30% in India and 37% in the United States and subject to many exemptions. But investment yields dwindling returns, as evidenced by debt significantly outgrowing China's gross domestic product (GDP) for the past 15 years.
That means tax revenue is also low. The International Monetary Fund calculates China's tax-to-GDP ratio at 14%, versus a 23% average for the Group of Seven economies.
This makes funding social spending difficult without raising taxes on capital or businesses. Taxing households more is a difficult proposition as China's upper personal income tax band is among the world's steepest, at 45%.
The difference between how capital and labour are taxed encourages low wages and high investment.
One tweak under debate could help long-term but might hurt consumers initially.
Chinese media has said policymakers may shift the consumption tax burden to wholesalers and retailers from producers and importers currently.
The proceeds would mostly flow to local governments, rather than the central government, thereby shifting incentives for local officials to support consumption instead of factories.
URBANISATION
Beijing has also pledged to further liberalise a Mao-era internal passport system that divides the population into those with rural resident permits and those with urban permits.
About 300 million rural migrant workers live in cities but have limited access to urban healthcare, education and other social benefits.
As a result, migrant workers save twice as much income as their urban peers, economists estimate.
But equalising access also demands greater government benefits and investment in schools and hospitals.
Chi Fulin, the head of the China Institute for Reform and Development, told Chinese media the estimated cost of fully urbanising a migrant worker was 50,000-to-155,900 yuan, which could add up to 46 trillion yuan ($6.33 trillion) nationally.
PROPERTY MARKET
Morgan Stanley estimates China needs about 10 trillion yuan in reforms within two years to avoid deflation. Of that, 3 trillion yuan should be spent on state purchases of empty apartments in big cities and the rest on social welfare.
LAND REFORMS
China's urban land is state-owned and a primary source of revenue for indebted local governments that lease it at a cost - a root cause for the overexpansion of the property sector.
Rural land is collectively owned by villages. Authorities sometimes expropriate rural land, primarily for industrial use, intermediating a transfer of resources from households to manufacturing.
Giving private entities full property rights and allowing market-driven transactions could ease industrial and residential overcapacity and improve household wealth, economists say.
CHILD SUBSIDIES
Demographers say the number of children in any economy directly correlates with domestic consumption.
Yuwa Population Research Institute, a Beijing think tank, suggested China should invest 10% of GDP, including on family subsidies, to stabilise the population.
STATE-OWNED ENTERPRISES
Total assets of non-financial state-owned firms (SOEs) reached 371.9 trillion yuan in 2023, the latest data showed. Some economists say these assets could be monetised to fund consumer reforms.
Critics say SOEs absorb ample capital from government transfers and through the state-dominated banking sector or debt issuance. Their return on assets is low and they hardly transfer profits back through dividends or other payments.
But they are also central to China's industrial and infrastructure policies, key drivers of growth in recent decades. Closures or privatisations would be a U-turn in the current policy trend and could deal a shock to the economy.
MONETARY POLICY
Officials lean on commercial banks to meet lending quotas. This channels finance to the state sector, seen as less risky. It also diverts resources away from the more productive private sector, which employs more people.
The central bank has pledged market-based reforms for lending. But the risk is that if banks make lending decisions solely on estimated returns, then credit supply to indebted SOEs could dry up, destabilising the economy.
($1 = 7.2687 Chinese yuan)
