Thursday, 27 September 2007

Why do the Chinese consume so little?

Interesting paper from the IMF attempting to explain the low level of consumption in China (relative to exports).

Such a pattern leaves China open to external macroeconomic shocks and the Chinese government is unlikely to change its exchange rate policy unless domestic consumption increases. Of course, saving will still be an important part of Chinese behaviour until the social security system improves. This paper suggests that surprisingly that this second reason is of minor importance.

I will need to read the paper carefully to see if the authors make a convincing case.


"Explaining China's Low Consumption: The Neglected Role of Household Income"
IMF Working Paper No. 07/181

International Monetary Fund (IMF) - Asia and
Pacific Department

Co-Author: LI CUI
International Monetary Fund (IMF)

Full Text:

ABSTRACT: The Chinese government has recently focused on the need to increase consumption to rebalance the economy. A widely held view is that despite China's remarkably high growth, the share of consumption in total expenditure has been low and declining due to high and rising saving rate of Chinese households as uncertainty over provision of pensions, and healthcare and education costs have increased since the mid-1990s. This paper finds that the rise in saving rate has been a minor factor. Much larger has been the role of the declining share of household income in national income, which has occurred across-the-board in wages, investment income, and government transfers. The paper finds that financial sector weaknesses, by restricting firms' access to bank financing for working capital, have played quantitatively a major role in keeping wage and investment income shares low and on a declining trend.


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