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The author is professor of follow, School of Enterprise and Economics, on the College of Hong Kong and former IMF China division chief
China’s commerce surplus continues to seize headlines, with a surprisingly sturdy begin to 2026. Different international locations more and more see this as proof that China’s system unfairly helps producers — at the price of jobs elsewhere. The consequence has been an escalating cycle of tit-for-tat tariffs and commerce limitations. However the rising surplus displays slowing home demand, not commerce modifications. The remedy, then, is to spice up consumption in China — one thing no quantity of tariffs can obtain. Thankfully, one highly effective lever exists: a dramatic, everlasting minimize within the payroll tax.
China’s present account surplus peaked at almost 10 per cent of GDP in 2007, following its accession to the World Commerce Group. This then evaporated, bottoming out at 0.2 per cent of GDP in 2018. The rebound since has been dramatic, reaching 3.7 per cent of GDP in 2025. On condition that China’s economic system has greater than doubled in dimension since 2007, as a share of world GDP the excess now rivals its earlier peak.
What explains this? For the reason that onset of the property disaster in 2021, China has been present process a large correction. Actual property funding is collapsing. In most international locations, this is able to have triggered a full-blown financial disaster. China has averted that destiny partly via elevated reliance on exterior demand.
Right here the story diverges from typical knowledge. Consumption just isn’t the offender. Total saving has barely moved from pre-pandemic ranges. Each consumption and incomes have held up remarkably properly given the dual shocks of the pandemic and property collapse. But typical knowledge is correct in regards to the answer. Stronger consumption is the very best remedy.
Accepting slower however extra sustainable progress would additionally assist. Focusing on progress charges inconsistent with productiveness tendencies and a shrinking working-age inhabitants results in distortive insurance policies. A extra average goal would assist slim the excess but additionally scale back imports, limiting the good points for buying and selling companions. It’s in the end preferable to remove the excess via stronger home consumption, permitting China to soak up extra of its personal output in addition to extra overseas output.
China has not been passive. The federal government has massively expanded medical insurance protection, considerably strengthened the pension system and broadened family entry to financing. It has additionally delivered the quickest per capita consumption progress of any main economic system since 2000. However even sooner GDP progress has pushed consumption’s share of GDP down.
The language from the Two Classes in March and the forthcoming fifteenth five-year plan is due to this fact encouraging, notably the specific aim of steadily elevating the family consumption share of GDP. However the scale of the problem calls for bolder motion.
Low-hanging fruit exists: payroll taxes. China levies European-level payroll taxes, creating a big wedge between the price of using a employee and their after-tax revenue — round 38 per cent. These taxes are additionally extremely regressive, utilized to revenue beneath a ceiling of 3 times the typical wage. Payroll taxes raised 6.5 per cent of GDP in 2024, in opposition to simply 1.1 per cent for private revenue taxes.
A dramatic, everlasting payroll tax minimize would due to this fact considerably increase consumption. It could put more cash in employees’ pockets, particularly lower-income employees with the best propensity to spend. It could elevate employment by decreasing labour prices. And it will scale back casual labour by giving employees stronger incentives to take part within the social safety system.
Such a minimize doesn’t seem like on the agenda. The employer pension contribution was completely minimize in 2019 and a few contribution charges have been quickly lowered through the pandemic. The pension system, nevertheless, faces a big long-term funding hole — projected payouts exceed projected revenues — that makes the federal government reluctant to chop contribution charges additional.
A payroll tax minimize just isn’t a panacea. Misplaced income would worsen China’s pension funding hole, however this might be addressed as soon as consumption is rising as a share of GDP. China’s tax income is already a low share of GDP — elevating VAT would in the end be way more environment friendly than at the moment’s heavy reliance on payroll taxes. However essentially the most pressing precedence is boosting consumption, not optimising the income combine.
More cash within the pockets of Chinese language employees would in the end translate into extra spending, greater residing requirements and, importantly, a smaller commerce surplus.
