A shopping mall in Dalian, China.
Photo Credit: Wikimedia
It is widely known that China needs to rebalance its economy to rely more on consumption, but the extent of China’s imbalance between consumption and investment is not fully appreciated. Comparisons to other emerging markets and countries like Japan, Taiwan, and Korea that pioneered the East Asian growth model show that China’s low levels of consumption are unparalleled.
Michael Pettis pointed out the unprecedented slide of consumption as a percentage of China’s economy in a paper for the Roundtable, China’s Troubled Transition to More Balanced Growth:
Five years ago household consumption in China declined to around 40 percent of GDP. This is probably unprecedented, and certainly is for a large economy in times of peace. Beijing’s response to this very low number, not surprisingly, was a worried one. Policymakers pledged to take every step necessary to raise household consumption growth and to help rebalance the economy.
While most observers hailed the new resolve and excitedly reported that with these new initiatives it was pretty clear that the low household consumption problem was about to be resolved, a few economists remained skeptical. They argued that Beijing would not be able to raise the consumption level because doing so would require fundamental change to the growth model, and there was as of yet no political consensus in favor of taking the necessary steps. They warned that consumption would barely grow from the 40 percent level for many years.
Even the skeptics were wrong. For the next five years GDP growth continued to surge ahead of household consumption growth until by last year household consumption represented an astonishing 36% of GDP.
China’s consumption share of GDP has fallen fairly steadily since the era of economic reform in the late seventies. But, as Pettis points out, during the past decade, the decline has been precipitous—falling from 46.4% in 2000 to 35.1% in 2010. As consumption has fallen, investment has grown and now makes up nearly half of GDP. From 2000 to 2009, the household consumption share of GDP fell 11.3%, while investment’s share rose by 12.4%.
Other emerging economies have maintained much higher levels of household consumption than China. Of the BRIC economies, China is the only one to have a consumption share of GDP drop below 45%. According to the International Monetary Fund, the household consumption share of the economies of Brazil, Russia, India and China were 62.8%, 54.1%, 57.3% and 35.1%, respectively.
China’s low household consumption share is also unprecedented throughout history -- most notably among other economies that pioneered the East Asian model of development marked by high levels of investment and low levels of household consumption. In Japan, South Korea, and Taiwan, household consumption fell during their early stages of development, but never to the levels of China’s current consumption.
Some analysts believe that China is rebalancing its economy and that it will soon achieve a more normal pattern of economic growth, but the transition to higher household consumption will take many years – if it is underway at all. If GDP grows by 6% per year and consumption outpaces overall growth by 2%, it won’t be until 2038 that consumption reaches a level of 60% of GDP, near the level of India, Brazil, Japan, and Taiwan today.