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.
Source: David Li and Sean Xu, The Rebalancing of the Chinese Economy, CCER-NBER Conference, 2012.
Another prominent Chinese economist, Cai Hongbin, also argued recently that Chinese consumption was underestimated by as much as 10 per cent due to the statistical difference between how China and western countries calculate housing consumption (Does China over invest and under spend?, 21 March 2014)
In fact, we should not be too surprised by China’s growing consumption as a share of GDP. China has been enjoying the strongest growth in consumer spending for at least the last few years compared to other major economies on double digits -- and this is according to IMF data.
So what is behind this increasing consumption share of GDP? The answer is actually quite simple: rising household incomes. This should come as no surprise to our readers, since we are seeing first hand the growing legions of Chinese tourists and students coming to Australia. They have the highest consumption per head of any group visiting our country.
For example, the 2013 wages of Chinese migrant workers increased 13.9 per cent from the previous year, nearly twice the growth rate of China’s GDP. For the country’s 269 million migrant workers, the average wage in 2013 was 2,609 yuan, or $480 a month. Though this may not seem to be a terribly large sum of money, it is a far cry from the mystical $2 a day.
In fact, Chinese wages increased most dramatically around the time of the global financial crisis. Between 2009 and 2013, Chinese wages surged 5.7 per cent, 19.3 per cent, 21.2 per cent, 11.8 per cent and 13.9 per cent, according to data from China’s National Bureau of Statistics.
The rapid rise in Chinese wages can be easily explained by Sir Arthur Lewis’s economic theory, laid down more than half a century ago. He argued that a developing country with "surplus" or under-employed labour could expand the industrial force for years without causing wage inflation.
This is reversed when a labour shortage emerges when wages increase rapidly. And China has reached the so-called Lewis Turning Point. This is exactly what happened in Taiwan and Korea in the 1980s: their consumption share of GDP started to rebound after reaching the Lewis Turning Point.
These new estimations and data should not be interpreted as a repudiation of the widely held assumption that the Chinese economy is unbalanced. It serves to remind people that the economy is undergoing a rapid transformation and it can be dangerous to have a static perspective without looking at the latest data.
Peter Cai will appear at The Australian’s “Australia in China’s century conference” on Friday May 30. For tickets click www.theaustralian.com.au/china