Higher welfare cheques to China’s farmers and migrant workers are less headline-grabbing than tariff spats or AI chip bans. But investors would do well to take note of any news coming out of a key policy meeting this week.
To us, any signal from the Fourth Plenary Session of the 20th Central Committee of the Communist Party of China (Fourth Plenum) which ends on Thursday, on welfare reform, could potentially be a game changer for rebalancing and strengthening economic growth and supporting capital markets.
We have written on the sexier subjects of China’s supply chains and drive for tech sovereignty. But it's just as important to get China’s households to start spending again, rather than saving their money due to insufficient social security. This is not a quick-fix issue that can be dealt with in soundbites. It touches over 500 million workers and pensioners and their families and poses a substantial administrative task. We don't expect any concrete policy proposals this week, they are likely to come out of meetings over the next year.
At 40% of GDP, China’s household consumption is almost half that of the US’s. Some government advisers suggest targeting US levels of almost 70% over the next decade.
Figure 1. China’s household consumption remains weak
Figures for China, EU, Global and High income countries are for 2023, Japan is for 2022 and the US for 2024. Source: Bloomberg, based on World Bank data.
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Over the past year, markets have often been disappointed by the absence of ‘big bazooka’ programmes to dispel the ‘three Ds’ – debt, deflation and demographics. As we keep saying, Beijing marches to its own tune, and there has been steady progress:
- Property and local-government debt risks have been contained via a balanced distribution of property-sector losses and a central-government pivot to supporting local resolution. Combined with incremental rebalancing and the anti-involution drive to curb wasteful, zero-sum manufacturing competition and duplicated capacity, that has put a floor under growth, and markets are beginning to price easing deflationary pressures
- The focus has been on self-sufficiency in key sectors, with technology and healthcare taking centre stage. China’s progress toward market leadership should not be underestimated; in fast-evolving fields such as AI and humanoid robotics it has genuine global leadership
- Despite tariff headlines, China has significantly reduced its reliance on the US, diversifying supply chains and cutting bilateral exposure, from almost 20% of trade at end-2018 to just below 15% at end-2024
Figure 2. Chinese exports to the US (12-month moving average as % of total exports, US$ billion)
Source: Bloomberg, as of 31 December 2024.
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The challenges
That said, years of excess-capacity investment have created oversupply that exports cannot absorb. Anti-involution will help, but the key is a pivot further to domestic demand. The household saving rate is about 35%, roughly double major-economy averages – and savings have averaged around 44% of GDP over three decades.
High precautionary savings reflect artificially high rates and successive shocks since 2018 (such as the COVID pandemic or the property downturn), but the root cause is structural: an insufficient safety net. Public social security spending was 11.7% of GDP in 2023, versus around 20% across the OECD.
Welfare reform
We believe a key driver of long-term rebalancing could be welfare reform that releases this pool of savings to support consumption and capital markets. The current system remains fragmented across regions and uneven between urban and rural residents. A back-of-the-envelope calculation by Morgan Stanley suggests that granting migrant workers and farmers equal access to pension and medical care could lower the household saving rate by three to five percentage points, with further declines if nationwide coverage is strengthened.
The upcoming Five-Year Plan will likely use welfare reform as a lever to unlock consumption. Encouraging households to save less and spend more could lift demand, nudge inflation higher, enhance corporate earnings and translate into stronger wage growth, the virtuous cycle investors are looking for.
How would this be paid for? We are already seeing discussions around a greater allocation toward social security from the general public budget, central-to-local government transfers, and frontloading of the 2026 bond issuance quota, suggesting that fiscal revenue growth has continued to pick up momentum throughout the year.
Consumption support
There have been other incremental steps to encourage spending since late last year: trade-in and equipment-renewal programmes for home appliances and vehicles; subsidies for digital products; local consumption vouchers and festive campaigns; fiscal support via a higher budget-deficit target and issuance of treasury bonds; and childcare, family and social subsidies to reduce household burdens and free up spending.
But, as we said, a real game changer could be comprehensive welfare coverage for rural residents and informal workers, who hold disproportionately high precautionary savings because benefits are substantially lower than for urban citizens. The current social security system mainly covers those with an urban Hukou (resident permit); those without are on a separate, thinner track. We think broadening Hukou access and harmonising benefits could materially reduce precautionary savings.
Take pensions for example: the Urban Employee Basic Pension (Hukou) covers 521 million people, and the Urban and Rural Resident Basic Pension covers 545 million; yet spending on the former was RMB 6.4 trillion in 2023 – 14 times higher than the latter.
It’s hard to argue with these numbers. While the attention and noise will likely remain on tariffs and chips, investors shouldn’t ignore this quieter revolution.
All data sourced from Bloomberg unless otherwise stated.
Author: Nick Wilcox, Managing Director, Discretionary Equities at Man Group.
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