One of the most celebrated pieces of received wisdom on the Chinese economy is that its consumers don’t spend enough. Many commentators, including the famed Nobel laureate Paul Krugman, argue that China’s unbalanced economy -- where investment accounts for about 50 per cent of the GDP -- is not sustainable.
In most countries, both developing and developed, consumption usually accounts for more than 70 per cent of GDP. In China, investment accounts for about half of the country’s GDP and consumption as a share of the economy has actually declined 10 per cent in the last decade.
Many believe this imbalance between investment and consumption is one of the fundamental flaws in the Chinese economy. It will lead to a major correction in the economy if it is not addressed properly.
While accepting the premise of this concern that the economy is unbalanced, it is a bit difficult to reconcile China’s strong retail data with the assertion that the country has too many reluctant consumers who don’t spend enough.
Even if you are a causal visitor to China, one of few things you will notice is the rampant consumerism. Foreign luxury stores are rushing to the country to open up new stores.
Respectable Chinese economists, including Yiping Huang, a former chief economist for Barclays and Citigroup and a professor at the Australian National University and Peking University, have started to challenge the widely-held view that Chinese consumers don’t spend enough.
Huang and his colleagues find that it is difficult to reconcile accelerating retail sales and declining consumption in official statistics after 2008. They calculate a new growth rate for consumption, which is based on the weighted average of consumption-related retail sales growth and services sales growth.
The result is interesting, as it contradicts the official Chinese statistics. Though their new calculation reveals that the consumption share of GDP fell during much of the decade as suggested by official data, it actually rebounded from 48 per cent in 2008 to 52 per cent in 2010.
The official consumption statistic for 2010 was only 47 per cent.
Source: Huang Yiping and Cai Feng, The New Normal of the Chinese Economy, 2013.
Two other Chinese economists, David Li and Sean Xu, have also argued that household consumption has rebounded since 2007, from 36 per cent to 38.5 per cent in 2011. Once again, official Chinese data underestimates the true growth in consumption.