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Ethos Perspectives
Private Consumption in China: Why it should be higher
China’s 1.3 billion consumers pick up the post-crisis slack in global demand? The consensus is that they are still not ready. While consumer spending is certainly rising, it is not growing rapidly enough to make up for shrinking demand in the US and other major markets. China has by far the lowest share of private consumption to GDP in Asia; indeed, Chinese private consumption declined from 46% of GDP in 2000 to 35% of GDP in 2008. China’s consumption-to-GDP ratio in 2008 was half that of the United States and about two-thirds of Europe and Japan; Chinese households command only some 56% of national income, compared with more than 60% in Europe and more than 70% in the United States. On the other hand, average urban household saving rates in China have been rising from 11% of disposable income to 28% from 1995 to 2008.
Ethos Perspectives examines China’s consumption deficiencies and why observers believe there is an urgent need for the Chinese economy to make a transition from exported-oriented growth to one that derives its strength from domestic private consumption; also highlighted are policy measures that could boost domestic private consumption in China.
Why the Chinese Consumer Needs to Spend
China needs domestic consumption to buffer against global demand slowdown
Stephen Roach, chairman of Morgan Stanley Asia suggests that the post-crisis economic climate is likely to mean a multi-year consolidation of American consumer demand. Export-driven economies like China can no longer depend on a vigorous rebound in global growth to sustain its export-led model as in the past. If China fails to transit to domestic consumption-driven mode, it risks compounding its already formidable trade/current account imbalances to unsustainable levels.
Stoking domestic private consumption: a key priority
In early 2007, Premier Wen Jiabao pointed out that while China’s economy appeared robust on the surface, it was increasingly "unstable, unbalanced, uncoordinated and ultimately unsustainable". In 2009, he emphasised that China should "make greater effort to enhance the role of domestic demand, especially final consumption, in spurring growth" and highlighted that this would be "a long-term strategic policy for China's economic growth". Stoking domestic private consumption has since become a top national policy agenda for China.
Why Are Chinese Consumers Not Spending?
Income insecurity and lack of
social safety net lead to high savings rates
Like many analysts, Stephen Roach attributes low private consumption and excessive savings in China to the lack of income security engendered by an inadequate social safety net, compounded by 15 years of reform and downsizing in state-own enterprises.
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