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January 14, 2013 6:26 pm
With Chinese economic growth slowing, and that of the global economy sluggish, calls for Beijing to boost domestic consumption are increasing.
It is now taken as a matter of fact that the Chinese consume too little and save too much and, as a result, the country has had to rely on investment and exports for the phenomenal growth of the past few decades. Indeed, according to official statistics, consumption makes up only 48 per cent of its gross domestic product. This is much lower not only than the worldwide rate of 80 per cent, but also than China’s own level 20 years ago of about 60 per cent. According to the popular view, its reluctant consumers have contributed to the global imbalance, and Beijing must therefore help to stimulate consumption and make China’s own growth sustainable.
However, the belief that China’s consumption is too low is a myth based on a flawed theory and a superficial reading of official data.
First, it assumes demand drives growth. Demand may determine current or short-term growth when an economy is operating at less than full capacity. But in fact long-term growth depends on capacity to produce – which in turn depends on investment in and accumulation of physical and human capital, and on the speed of technological progress.
Low consumption means high savings levels, which makes high investment possible without heavy borrowing from overseas. Indeed, these are among the most important factors behind China’s rapid growth. From 1990 to 2010, GDP grew at an average of almost 10.5 per cent a year, while consumption grew at 8.6 per cent (both adjusted for inflation) – no laughing matter when the world average was less than 3 per cent. It may sound paradoxical, but China’s relatively low consumption rate is one reason the growth in the rate of its consumption has been so high.
But some may still point to the fact that a 48 per cent consumption rate is unusually low. Few countries, it seems, have had such low consumption for a sustained period. Even high-income east Asian economies appear to have had much higher rates during their periods of rapid growth. If true, China’s investment efficiency may be too low, presumably a result of too much investment.
This argument leads to our second point: consumption has been underestimated by official statistics. The true ratio could be 60-65 per cent – both normal and desirable for a fast-growing developing economy.
There are several sources of error. First, housing consumption – at just 6 per cent of GDP – is seriously underestimated in view of exorbitant property prices. It makes up about 14 per cent in the bigger Organisation for Economic Co-operation and Development countries. According to our estimate, China’s true rate is no less than 10 per cent.
Second, official statistics do not account for private consumption paid for by companies and treated as business costs or investment expenditure. There is a great deal of this in China – for example, we suspect, most imported luxury cars. If such private consumption makes up, speaking conservatively, 10 per cent of household consumption, China’s consumption rises by more than 3 per cent of GDP.
The third source of underestimation relates to the household survey method. High-income households are known to be under-represented in the sample. And, as there are no explicit incentives to be accurate, participating households may easily fail to report some expenditures. In-kind consumption is often under-recorded or undervalued.
Finally, when we compare China’s consumption ratio with others’, using national prices can be misleading. Academics often use the Penn World Table, developed at the University of Pennsylvania for cross-country comparison. PWT makes purchasing power parity adjustments to national consumption and investment price levels as well as official or market exchange rates. According to the latest version, China’s consumption ratio stood at 60.9 per cent in 2010, the most recent year it covers, not the official 47.4 per cent.
Furthermore, instead of a declining ratio in the past 20 years, the PWT shows a stable ratio of about 60 per cent. So if China’s consumption rate is too low then, at least according to the PWT, it has been this low throughout a period of extraordinary growth.
It may be folly to place all our trust in the PWT. But combined with the fact that a substantial amount of consumption is not officially accounted for, it seems safe to say the real ratio, measured in comparable international prices, should be no less than 60 per cent – similar to the level of east Asian tiger economies.
Indeed, probably because of this similarity in the relatively low propensity to consume and high propensity to save, China may be on its way to becoming the next high-income east Asian economy.
The writers are, respectively, director of the China Centre for Economic Studies at Fudan University and professor at the China Europe International Business School
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