China’s ambitious long-term economic blueprint, laid out by the Third Plenum of the 20th Central Committee of the Chinese Communist Party, raised concerns over its platitudes and a lack of details. But one of the goals of the lengthy report – to raise the share of household disposable income in GDP – could inadvertently lead to benign economic and political reforms in China.
Historically, household disposable income as a share of GDP has been the invisible hand stirring Chinese politics. From 1949 to 1979, the Chinese government held the major share of the wealth and firmly controlled all aspects of life. The economic reforms initiated in 1978 at the 11th Central Committee’s Third Plenum loosened the government’s control over the social economy, and the household disposable income consequently increased from 44 percent of GDP in 1978 to 62 percent in 1983. The people gained more wealth and freedom, and China was transformed from a totalitarian state to an authoritarian one.
This came at a time when China’s population had a high proportion of youth. As a result of these converging trends, society was full of vitality and democratic enthusiasm, and there was a massive pro-democracy movement that culminated in the 1989 Tiananmen Square protest. It took a bloody crackdown to crush the movement.
Since then, despite three decades of rapid economic growth and its accession to the World Trade Organization in 2001, China has never again experienced a massive pro-democracy movement, and its politics have continued to regress since 2008. Western observers simply attribute this to increased political control and censorship, ignoring the fact that the one-child policy has reshaped China both demographically and economically.
To start with, just as it is vital to maintain optimal levels of blood pressure and blood oxygen content to avoid illness and even death, workers and consumers, incomes and consumption need to be in balance to ensure a healthy economy. Household disposable income typically accounts for two-thirds of a country’s GDP to sustain household consumption at 50-65 percent of GDP, as was the case in China in the early 1980s.
Children wield significant spending power because spending on offspring is instinctual for parents. However, China’s one-child policy had resulted in fewer children, reducing the total dependency ratio – the ratio of people under 15 or over 64 to those aged 15-64. This meant families with lower household incomes were able to make ends meet, reducing pressure on the government to address the issue.
To add insult to injury, the 1994 tax-sharing reform centralized fiscal authority and reduced local government revenues while leaving their responsibilities unchanged. To make ends meet, local governments sold land, leading to a property bubble, and suppressed households. As a result, China’s household income as a share of GDP declined to between 40 percent and 44 percent in 2006-2023, lower than it was in 1978.
As a consequence, China has yet to develop a middle class capable of exerting pressure on the government. Since 2008, the Chinese government has been regressing on all fronts, reasserting more top-down control over the economy and tightening censorship and other forms of social and political control. It is a historical irony that China has once again become a totalitarian state, with extremely tragic economic, demographic, and geopolitical consequences.
China’s wealth lies disproportionately in the hands of governments, enterprises, and investors, which makes enterprises more competitive, and gives the governments more financial resources for industrial subsidies and investment.
Household consumption typically accounts for 85 percent to 90 percent of household disposable income. China’s declining share of disposable income in GDP has led to a decline in household consumption as a share of GDP from 53 percent in 1983 to 37 percent in 2022. Compare that with 68 percent in the United States, 61 percent in India, and 55 percent in Vietnam.
Insufficient domestic consumption has left China with a surplus of about 100 million workers, which, together with industrial subsidies and high investment rates, has led to overcapacity. In 2023, for example, China produced 30 million vehicles and exported 5 million. If household income rose to a normal level of two-thirds of GDP, domestic consumers could buy all these vehicles without exporting them, and China could import far more goods.
China has always pursued a trade surplus to digest excess capacity, three-quarters of which in 2001-2018 was with the United States, providing tens of millions of jobs for China. Between 2001 and 2018, Chinese imports of goods from the United States amounted to only 23 percent of what China exported to the U.S., compared to a ratio of 72 percent for U.S. trade with the rest of the world.
Although this excessively unbalanced trade did benefit the U.S. bond market and Americans, who benefited from low prices and low inflation, it also undermined the U.S. manufacturing sector, with devastating social consequences. The U.S. share of world manufacturing exports stabilized at 13 percent between 1971 and 2000, but fell sharply after China joined the WTO in 2001, dropping to 6 percent in 2022. The U.S. share of world manufacturing value added likewise fell from 25 percent in 2000 to 16 percent in 2022.
States in the so-called Rust Belt have been the main victims, and they propelled Donald Trump to the presidency in 2016 based on his pledge to revive U.S. manufacturing. Hoping to attract votes from the Rust Belt states once again, Trump picked J.D. Vance as the Republican vice presidential nominee this year.
It can be seen that China’s one-child policy has not only changed the political trajectory of China, but also reshaped the political landscape of the United States.
Unbalanced trade and widening ideological incompatibilities have led to the deterioration of China-U.S. relations. The China-U.S. trade war that broke out in 2018 has led to a significant reduction in China’s trade surplus with the United States, exacerbating unemployment pressure in China.
China has paid a terrible price for its low household income – and low domestic consumption – in the form of demographic collapse. Many ordinary families cannot afford to raise even one child, and as a result, China’s fertility rate fell from 2.3 births per woman in 1990 to 1.0 last year. Both the two- and three-child policies have been abject failures.
When other countries reached China’s current rate of enrollment in tertiary education, the service sector provided 70-80 percent of jobs. However, due to underconsumption, China’s service sector provides only 45 percent of jobs, which makes it difficult for college graduates, who are primarily engaged in the service sector, to find jobs. The result: high youth unemployment and declining marriage and fertility rates.
Meanwhile, due to the growing elderly population, China’s total dependency ratio began to rise in 2012, and the economy began to decelerate accordingly. Increasing social security spending and healthcare expenses have put China’s local governments deep in debt. In response, the Third Plenum pledged to increase the share of household disposable income in GDP and local governments’ share in total tax revenue.
Such reforms could indirectly help alleviate China’s overcapacity and balance China-U.S. trade by boosting consumption, increasing imports from the U.S. and thereby reducing political hostility between the two major powers. It could also expand the middle class, thereby benignly reshaping China’s society and economy, and making Chinese politics more compatible with Western democracy.
But the West should not harbor unrealistic fantasies about Chinese politics. China will not witness a 1989-style new democratic movement and a Taiwan-style democratic transition, for two reasons.
First, demographics have changed dramatically. Young people aged 15-29, who spearheaded the democratic transitions in Taiwan and South Korea in the 1980s and China’s pro-democracy movement in 1989, have seen their share of the Chinese population drop from 31 percent in 1989 to 16 percent now, and China’s median age has risen from 25 to 43.
Second, China’s quest to raise household income will be difficult to achieve. In Japan, household disposable income fell from 62 percent of GDP in 1994 to 51 percent in 2023, due to the economic slowdown and increased government spending caused by aging. It is almost impossible for an aging China to develop a middle class strong enough to drive a democratic transition.