cross-posted from: https://beehaw.org/post/17596971

Here is the study: How Weakness in the Social Safety Net Undermines the Political Compact in China (pdf)

“To promote common prosperity, we cannot engage in ‘welfarism.’ In the past, high welfare in some populist Latin American countries fostered a group of ‘lazy people’ who got something for nothing. As a result, their national finances were overwhelmed, and these countries fell into the ‘middle income trap’ for a long time. Once welfare benefits go up, they cannot come down. It is unsustainable to engage in ‘welfarism’ that exceeds our capabilities. It will inevitably bring about serious economic and political problems.” – Xi Jinping

Summary of the study

This policy memo details China’s approach to social welfare and its impact on the nation’s socioeconomic stability. Xi Jinping and other Chinese Communist Party (CCP) leaders have an aversion to being “welfarist,” which historically aligns with China’s tendency to view its citizens as a source for labor and tax revenue rather than as human resources to be cultivated and assisted when in need. This has resulted in a social safety net that considerably lags international standards, especially those of developed and even middle-income countries.

High debt levels burden Chinese local governments, and shrinking revenues, declining birthrates, falling marriage rates, and aging populations further fuel the deterioration of government finances. These problems contribute to the growing financial vulnerability of Chinese households and create significant concerns for future generations. Families often shoulder the costs of caring for their elderly, educating their children, and paying for healthcare. China’s public healthcare spending is limited, with around 7 percent of gross domestic product devoted to the national system. Families, on average, spend at least 27 percent out-of-pocket of their total health costs to make up for shortfalls in their health insurance, compared to just 11 percent in the United States.

Local governments are responsible for more than 90 percent of China’s social services costs but only receive about 50 percent of tax revenues. For decades, they have relied on land sales and related real estate revenues to meet their budgets, but both sources have declined precipitously as the housing boom has reversed course. According to the Rhodium Group, more than half of Chinese cities face difficulties paying down their debt, or even meeting interest payments, severely limiting their resources for social services. China’s total debt levels are estimated to be around 140 percent of GDP, limiting budget flexibility for supporting social services.

China’s household savings rates are high by global standards, as Chinese increasingly use personal resources to cover shortfalls in the national safety net. As a result, consumer spending and confidence are down. China has seen lower wage growth in recent years, especially in the private sector, reversing the trend of elevated growth in the first part of the 2010s. Through his dual circulation model of growth, Xi Jinping hopes to shift the country away from an export- and investment-driven economy to a consumption-driven model. But the growing burdens on youth and families undermine this shift.

There are major shortfalls in access to, and quality of, education and healthcare systems, especially in rural areas. The hukou system of residency compounds these problems, stopping many rural migrants from obtaining urban residency and thus preventing them from accessing higher quality urban social services.

Due to severe wealth inequality, low tax revenues, and the decision to prioritize resources for national security and investment in manufacturing and technology, Beijing has limited resources to improve social welfare programs. Low public confidence in the economy and consumer market—fueled by the COVID lockdowns—has reinforced falling birth and marriage rates. Youth unemployment and public dissent have also increased, with the so-called lying flat movement and white hair demonstrations exemplifying public rejection of China’s attitudes toward overworking, professional achievement, and CCP handling of elder care and other social services.

Xi and the CCP have chosen to maintain a limited social services system. Their reluctance to improve the system has contributed to a cycle of slowing economic growth, massive debt levels, stressed personal finances, and declining public confidence. China’s ambitions to become a consumption-driven economy will face significant challenges, possibly further straining the implied social contract that has for decades resulted in social and political stability.