{"text":[[{"start":6.2,"text":"The writer is professor of practice, Faculty of Business and Economics, at the University of Hong Kong and former IMF China division chief "}],[{"start":16.5,"text":"China’s trade surplus continues to grab headlines, with a surprisingly strong start to 2026. Other countries increasingly see this as evidence that China’s system unfairly supports manufacturers — at the cost of jobs elsewhere. The result has been an escalating cycle of tit-for-tat tariffs and trade barriers. But the rising surplus reflects slowing domestic demand, not trade changes. The cure, then, is to boost consumption in China — something no amount of tariffs can achieve. Fortunately, one powerful lever exists: a dramatic, permanent cut in the payroll tax."}],[{"start":54.05,"text":"China’s current account surplus peaked at nearly 10 per cent of GDP in 2007, following its accession to the World Trade Organization. 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. Given that China’s economy has more than doubled in size since 2007, as a share of global GDP the surplus now rivals its previous peak."}],[{"start":85.19999999999999,"text":"What explains this? Since the onset of the property crisis in 2021, China has been undergoing a massive correction. Real estate investment is collapsing. In most countries, this would have triggered a full-blown economic crisis. China has avoided that fate in part through increased reliance on external demand."}],[{"start":104.85,"text":"Here the story diverges from conventional wisdom. Consumption is not the culprit. Overall saving has barely moved from pre-pandemic levels. Both consumption and incomes have held up remarkably well given the twin shocks of the pandemic and property collapse. Yet conventional wisdom is right about the solution. Stronger consumption is the best cure."}],[{"start":127.55,"text":"Accepting slower but more sustainable growth would also help. Targeting growth rates inconsistent with productivity trends and a shrinking working-age population leads to distortive policies. A more moderate target would help narrow the surplus but also reduce imports, limiting the gains for trading partners. It is ultimately preferable to eliminate the surplus through stronger domestic consumption, allowing China to absorb more of its own output as well as more foreign output."}],[{"start":157.3,"text":"China has not been passive. The government has massively expanded health insurance coverage, significantly strengthened the pension system and broadened household access to financing. It has also delivered the fastest per capita consumption growth of any major economy since 2000. But even faster GDP growth has pushed consumption’s share of GDP down. "}],[{"start":179.75,"text":"The language from the Two Sessions in March and the forthcoming 15th five-year plan is therefore encouraging, particularly the explicit goal of gradually raising the household consumption share of GDP. But the scale of the challenge demands bolder action. "}],[{"start":193.85,"text":"Low-hanging fruit exists: payroll taxes. China levies European-level payroll taxes, creating a large wedge between the cost of employing a worker and their after-tax income — around 38 per cent. These taxes are also highly regressive, applied to income below a ceiling of three times the average wage. Payroll taxes raised 6.5 per cent of GDP in 2024, against just 1.1 per cent for personal income taxes."}],[{"start":221.45,"text":"A dramatic, permanent payroll tax cut would therefore significantly boost consumption. It would put more money in workers’ pockets, especially lower-income workers with the highest propensity to spend. It would raise employment by lowering labour costs. And it would reduce informal labour by giving workers stronger incentives to participate in the social security system."}],[{"start":243.85,"text":"Such a cut does not appear to be on the agenda. The employer pension contribution was permanently cut in 2019 and some contribution rates were temporarily lowered during the pandemic. The pension system, however, faces a large long-term funding gap — projected payouts exceed projected revenues — that makes the government reluctant to cut contribution rates further."}],[{"start":266.9,"text":"A payroll tax cut is not a panacea. Lost revenue would worsen China’s pension funding gap, but this could be addressed once consumption is rising as a share of GDP. China’s tax revenue is already a low share of GDP — raising VAT would ultimately be far more efficient than today’s heavy reliance on payroll taxes. But the most urgent priority is boosting consumption, not optimising the revenue mix."}],[{"start":292.7,"text":"More money in the pockets of Chinese workers would ultimately translate into more spending, higher living standards and, importantly, a smaller trade surplus. "}],[{"start":308.84999999999997,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1776758208_2279.mp3"}