COVID-19 continues to cause chaos around the world, both socially and economically. As social distancing measures continue to be enforced in most countries, businesses are facing an unprecedented challenge. While some companies struggle to survive either by moving online or taking subsidies from the government, others are beginning to fall victim to the deadly pandemic. Since March, more than 110 major companies in the U.S. alone have filed for bankruptcy and blamed COVID-19 as the main reason. As businesses fail, unemployment rates worldwide have also skyrocketed. Just the past week, the U.S. government received 1.3 million new unemployment claims. Confronted with the potential of another great depression, governments worldwide have issued a series of stimulus packages in forms of government bailouts, cash handouts, employment subsidies, and transfer payments. Furthermore, monetary policies have also been issued to lower interest rates and encourage investments. In China, however, things are a little different. Since the Chinese government got the COVID-19 outbreak under control, local governments in China have been keen to issue “consumption vouchers” or “consumption coupons,”, which serve as normal coupons when people purchase items in selected restaurants and supermarkets, usually in the form of digital codes. The strategy became so popular that consumption vouchers were soon seen in most provinces and cities. But experts across industries were also quick to express their concerns about the voucher scheme, mainly in terms of its economic effect, social ramifications, and potential unfairness. Now that the scheme is largely over, it seems apropos to examine the evidence we have and understand why it failed.

“... vouchers encourage consumption, thus boosting the production of goods, which in turn provides more employment opportunities, making people wealthier and leading them to consume more.”

First things first, what is a consumption voucher? A consumption voucher is a short-term policy tool commonly used during a recession to stimulate consumption. It differs from other coupons (e.g. double eleven coupons) in that a consumption voucher is, in essence, a transfer payment -- cash given by the government to individuals who do not supply anything in exchange, not unlike social security benefits. Transfer payments are believed to generate economic growth much greater than the original investment. This is because, according to Keynesian economics, transfer payments have a “multiplier effect” -- meaning that every single dollar the government spends leads to an overall economic growth of more than $1. The rationale is that vouchers encourage consumption, thus boosting the production of goods, which in turn provides more employment opportunities, making people wealthier and leading them to consume more. The resulting self-reinforcing loop means issuing consumption vouchers is, in theory, a highly effective and efficient method of economic revival. In a joint report from Peking University’s Guanghua School of Management and Ant Financial, researchers studied the usage of consumption coupons in Hangzhou and found ¥1 of government transfer payment resulted in ¥3.5 of additional consumption on average. They also concluded that the positive result was largely due to them being distributed via smartphone apps as digital codes, preventing them from being turned into savings, which does not contribute to overall spending.

Despite the predominant public discourse which praises this strategy for significantly boosting consumption countrywide, critics have cast doubt on many aspects of the scheme. Doubters of the strategy note that the amount of spending triggered by vouchers and coupons accounts for very little of the total consumption, and that it aims to help businesses survive rather than providing vital life support to low-income households. Additionally, many researchers also expressed concern that promoting digital coupons on smartphone apps could further strengthen the dominance of leading online payment platforms such as WeChat Pay and Alipay.

“The aggregate effect of vouchers and coupons is limited because the consumption triggered accounts for a tiny share of overall spending,” said Xu Qiyuan, a researcher at the Chinese Academy of Social Sciences via Caixin. Before May, 28 provinces in China had handed out ¥19 billion worth of consumption vouchers. Even if we assume ¥1 of vouchers leads to a total spending of ¥3.5 (multiplier of 3.5), the increased spending would only amount to approximately ¥100,000 billion over 4 months. However, according to the National Bureau of Statistics of China, domestic retail sales in April alone were ¥2.8 trillion, rendering the consumption boosting effect of coupons insignificant.

In contrast to China’s voucher initiative, which focuses more on encouraging consumption and supporting businesses, government policies in many countries have instead prioritized the need to subsidize low-income households and the unemployed, due to their economic vulnerabilities. In South Korea, Japan, and Singapore, governments have announced multiple rounds of cash handouts, mainly targeted at students, workers in affected industries, low-income families, and unemployed citizens. Compared to vouchers, cash handouts enable policymakers to target specifically those in need and allocate resources more efficiently to ensure a smooth recovery.

The intention of consumption vouchers, therefore, is out of the consideration for industries rather than the general public. Most notably, the majority of these vouchers are distributed on mobile platforms such as WeChat and Alipay, making them inaccessible to low-income individuals who use digital payments less frequently or do not own a smartphone. These people not benefited from the scheme, however, happen to be the most financially vulnerable in a public health crisis. To make matters worse, the money that the government indeed spent on coupons and vouchers may not be working brilliantly either.

“Apart from favoring the rich and neglecting the poor, some experts have also expressed concern that China’s voucher initiative could further reinforce the dominant positions of leading digital payment platforms such as Alipay and WeChat Pay.”

“Lots of coupons are spent on daily necessities,” said Zhang Qidi, a researcher at the Central University of Finance and Economics in Beijing via Reuters. “When consumers use coupons to purchase them, they could actually save the cash they’d spend otherwise.” Spending on these necessities would happen anyway, so if coupons are predominantly used to purchase items such as rice, cooking oil, and laundry detergent, the stimulus effect would be severely undermined since no new spending is created in the process.

In absence of a significant enough stimulus effect, the practical value of a consumption voucher is no different from a cash handout of the same amount. To illustrate, suppose you used a ¥10 voucher to purchase an essential item, one that you would pay for regardless of the voucher, the end effect would be the same as when you were given a ¥10 bill from the government. As a result, we see that the voucher initiative has, in essence, turned into a cash handout scheme only for the rich, who can afford to pay over the threshold and own a fancy smartphone.

Apart from favoring the rich and neglecting the poor, some experts have also expressed concern that China’s voucher initiative could further reinforce the dominant positions of leading digital payment platforms such as Alipay and WeChat Pay. Since these platforms have already taken up 95% of the digital payment market, local governments prefer to distribute their coupons there;. Hhowever, Alibaba and Tencent, who operate Alipay and WeChat Pay, have a lot to gain from this initiative, because it serves as a great opportunity to research consumer behaviors and improve user experience in their future coupon sales. For the sake of fairness, more platforms should be allowed to distribute vouchers and gain from this initiative.

As the situation in China continues to improve and the economy slowly recovers, it is unlikely that we will see consumption vouchers being mentioned again in China’s next trillion yuan stimulus package. Nevertheless, the lesson must be learned. While boosting consumption among the wealthier population can indeed raise sales figures speedily, no low-income households should be sacrificed or neglected in the process, especially not when a high unemployment rate has robbed many of their livelihoods. As of now, no stimulus package has been announced that predominantly aims to aid low-income households through transfer payments or subsidies.

This article was written byYihan Xu based in Shanghai, China. Please follow author's instagram felixxu1708 or go to author's blog wp.nyu.edu/mrxuecon to get in touch.