China’s recipe for higher consumption and steady economic growth

By Wang Xiaolu and Zhou Yixiao

First, until recently, in the past few decades wages in China grew slower than economic growth, leading to a declining share of GDP for both household income and consumption.

For China to solve the problem of insufficient domestic consumption demand, and thus to sustain fast economic growth, the key issue is to push forward institutional reforms and policy adjustments.

This will be needed to rationalise government spending, promote market-oriented resource allocation, and improve the social security, public services and transfer payment systems, in order to improve the pattern of income distribution.

This implies that the greater the income inequality, the higher the savings rate and the lower the rate of household consumption.

During the earlier reform period in the 1980s and 1990s, the consumption rate generally remained above 60 per cent, and then dropped significantly to 48. 2 per cent from 2000–2010, a reduction of 14. 1 percentage points.

Insufficient consumption mainly arises from the current pattern of income distribution, due to both imbalanced income distribution between the government, corporations and households, and great income inequality.

China’s consumption rate gradually decreased from 78. 9 to 62. 1 per cent between 1952–1978, while the savings rate gradually increased.

In 2011, the savings rate of the lowest tenth of urban households ranked by annual income was 6. 5 per cent, while that of the top 10 per cent of households was as high as 40. 2 per cent.

The average growth rate dropped from above 10 per centto 9. 3 per cent between 2008–2011, and then to 7. 7 per cent in both 2012 and 2013, according to China’s National Bureau of Statistics.

Read more here: Business Spectator


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