The China consumption boom

Tyler Cowen linked to this excellent FT article on the Chinese economy by Yukon Huang:

In sum, urbanisation largely explains both the decline in labor’s share of income and the increase in savings rates, which together explain the decline in consumption as a share of GDP. Also worth noting is that contrary to popular perceptions per capita consumption has been growing by 8 percent annually “” the highest of any major economy “” even as the consumption share to GDP has been falling.

China’s unbalanced growth pattern mirrors other successful emerging East Asian economies that went through a similar urbanisation-industrialisation process several decades ago. The consumption share of GDP for Japan, South Korea and Taiwan fell by 20-30 percentage points, bottoming out at adjusted per capita income levels in the range of US$12-15,000 compared with China’s current $9,000. The decline in the consumption share is mirrored by a sustained increase in the investment share of GDP in all three economies, peaking around 40 percent of GDP. The common thread linking all these East Asian countries is that widening imbalances were associated with urbanisation and high growth rates that allowed them to escape the middle income trap and eventually transition to more balanced outcomes as their economies matured.

Misinterpreting the reasons why China’s growth is unbalanced in terms of macro-aggregates leads to the wrong policy prescriptions, including the argument that China needs a more “consumption-led” growth model “” a concept which does not exist in economic theory “” or that China needs to grow more slowly so that the share of consumption to GDP will increase “” which confuses means and end.

But China does face major economic problems brought on by declining productivity and surging debt levels. The challenge for the new leadership is to escape the middle income trap by implementing a complex set of structural reforms so that the economy can grow at around 7 percent for the remainder of this decade. This will not be easy. China needs to improve the efficiency of its urbanisation process and develop more appropriate financing sources. If it succeeds, then rebalancing will eventually occur as a byproduct of a more sustainable growth path but not as the intrinsic objective.

A few comments:

1.  Why has consumption grown faster in China than any other major country?  Probably due to high rates of investment.  Something to keep in mind when people argue that high rates of investment hurt the Chinese consumer.  Indeed the fact that China got a later start than Korea and Taiwan means their investment/GDP ratio should peak at an even higher level than the previous tiger economies.

2.  Here’s what does hurt Chinese consumers; inefficient SOEs.  Huang is right that if China wants to grow at 7% for the rest of the decade it must continue to reform it’s economy.  The November meeting will be decisive.  I believe they will do further reforms and that China will continue to boom.  However I don’t believe growth will still be at 7% by 2020.  It will slow modestly, perhaps to 6%.

PS.  How inefficient are Chinese SOEs?  Very:

The big banks have been here before. In the 1990s an elaborate bail-out was devised to recapitalise the Big Four and transfer dud loans to asset-management companies. It is improbable that a big Chinese bank would be allowed to go under if a similar situation arose again. Nevertheless their market share is rightly under threat.

Three changes in particular are weakening their position. The first is the stagnation of SOEs, which stands in sharp contrast with the dynamism of the “bamboo capitalists” in the private sector. Nicholas Lardy of the Peterson Institute for International Economics, a think-tank, calculates that over the past decade SOEs have destroyed so much value that, in the aggregate, they have produced negative real returns on capital employed. But private industrial firms, which create most jobs and much economic growth, have sharply positive returns.

Something to think about when people praise China’s “statist” model of development.

PPS.  It’s possible that Lardy’s claim is exaggerated, but the basic point remains—SOEs are very inefficient.



8 Responses to “The China consumption boom”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    8. September 2013 at 07:40

    One of the main things I got from Coase and Ning Wang’s book on China was the deception of China’s leaders in the post-Mao period. ALL the lip service was ‘We’re not abandoning socialism, nor sirree, we’re improving it. Yeah, yeah, that’s the ticket, we’re improving socialism.’

    All the while introducing market forces into the economy.

  2. Gravatar of Geoff Geoff
    8. September 2013 at 08:21

    SOEs? They are inefficient. I want the Chinese to abolish all SOEs. SOEs reduce standards of living. SOEs are based on coercion.

    But let’s keep the banking SOE. That is efficient. I don’t want the Chinese to abolish the BOC. It doesn’t reduce standards of living. I don’t mind it’s based on coercion.

    Got to love the consistency.

  3. Gravatar of John Papola John Papola
    8. September 2013 at 09:46

    I LOVE this post by Mr. Huang. It’s just terrific.

    There is no such thing as “consumption led growth”. This is one of the oldest, most ridiculous, most popularly-reinforced and socially destructive fallacies of the Keynesian mainstream.

    Consumption uses up output. It cannot “lead growth”. Ever. But such nonsense does, tragically, exist in popularized Keynesianism and even in The General Theory itself. Keynesian macro sandblasts actual economic analysis under its aggregates to the point of actually destroying it, reverse the causality basic means and ends. And so we get potential Fed chairmen who believe that the Kobe earthquake had lead to “economic strength” (Summers) or that a wasteful buildup for fake alien invasion could restore prosperity (Krugman).

  4. Gravatar of Geoff Geoff
    8. September 2013 at 12:26

    John Papola:

    Your critique of Keynesianism, which I fully agree with, applies with equal force to NGDPLT and all other forms of “monetarism.” Instead of consumption of output, it’s “spending” on output.

  5. Gravatar of benjamin cole benjamin cole
    8. September 2013 at 13:26

    Excellent blogging. All East Asian economies evolved using export models. Government-backed export industries pegged exchange rates etc.

    On China we add in a central bank PBoC controlled by the Chinese Communist Party. Not independent.

    It works so far.

    The future? We are talking about a nation of 1.5 billion where opacity is the norm and political repression common. It is hard to know anything.

    Their banks are swamped with bad loans—-but maybe it does not matter. The PBoC prints money and recaps banks. The like a cheap currency anyway.

    What if the China story is this: They used their central bank to encourage robust growth. The Bank of Japan and the Fed were fixated on inflation.

    China boomed and Japan and the USA stagnated. Someone have a better explanation?

  6. Gravatar of John Papola John Papola
    8. September 2013 at 16:05


    The notion that there can be problematic effects due to deflationary hoarding of money is a thoroughly classical position consistent with Austrian capital-based macroeconomics. I wouldn’t characterize purely monetary theories like Sumner’s as being in the same vein as confused nonsense that is Keynesian/Malthusian “macro”. Money is an interesting and special good with no price or market of it’s own.

    For a really terrific classical take-down of Keynesian consumptionism, check out JS Mill’s “Of the Influence of Consumption on Production”.

  7. Gravatar of ssumner ssumner
    9. September 2013 at 05:16

    Patrick, I loved the the Coase book.

  8. Gravatar of Geoff Geoff
    9. September 2013 at 16:14


    “The notion that there can be problematic effects due to deflationary hoarding of money is a thoroughly classical position consistent with Austrian capital-based macroeconomics.”

    The notion that these “problematic effects” have no purpose other than economic destruction and human misery, that we should always seek to stop them by governmental force, is something I regard as wrong, dangerous, and exacerbates human misery by preventing needed cures.

    Deflationary hoarding of money does not occur for no reason. It would behoove you to find out reasons why it would occur, the causes, and the benefits it generates. I for one respect any and all voluntary actions as inherently beneficial, for the simple reason that people freely do it without coercing other people’s persons or property is by definition beneficial behavior.

    Introducing coercion into otherwise peaceful, consenting behavior is never a social benefit. It only creates victims those who benefit at the expense of the victims (in the short run), and in the long run it hurts everyone by preventing mutually beneficial behavior.

    A person is not committing an initiation of force against anyone by holding onto their earnings a little longer than they did previously, such that you observe an aggregate statistic fall over time from one moment to the next. There is no justification for anyone to introduce violence to “solve” this non-existent problem.

    Jobs are not a right.

    Employment is not a right.

    Wealth is not a right.

    These things are privileges that are benevolently granted onto you by the effort and resources of other human beings, who agree to give to you because you give to them. If you do not want to give, you should not be forced to give. If others refuse to give to you, they should not be forced to give to you.

    There is nothing wrong with temporary unemployment that arises because Mr. Smith and Mr. Jones spend less money this year as opposed to last year, because their preferences are not what you thought they were going to be.

    “I wouldn’t characterize purely monetary theories like Sumner’s as being in the same vein as confused nonsense that is Keynesian/Malthusian “macro”. Money is an interesting and special good with no price or market of it’s own.”

    First, I would characterize monetarist theories as just that. They are just as confused as Keynesian gobbledygook. The only difference is that instead of “demand” being the holy grail, in (market) monetarism “spending” is the holy grail.

    Both explicitly deny grounding their theories on individual activity, that is, individual preferences. This avoidance has turned into ignorance, and that ignorance has been approached with such disdain and contempt that we now hear statements that “true” economics, or “superior” economics can’t be explained by being grounded on individual activity. That individual activity grounded economics is somehow limited and incomplete. This catastrophic error in reasoning has led to ridiculous policy prescriptions of central control, that surprise surprise, require socialist coercion and violence in order to bring them about.

    Without coercion, market monetarism does not exist.

    Without coercion, Keynesianism does not exist.

    Without coercion, Austrianism still exists.

    I hope you can appreciate why I lump Monetarism in with Keynesianism. For those of us who understand economics in terms of the individual, and all the logical categories thereof, there is no fundamental difference between Keynesianism and Monetarism. Epistemologically and methodologically, they are indistinguishable. Government controls this variable instead of that variable.

    “For a really terrific classical take-down of Keynesian consumptionism, check out JS Mill’s “Of the Influence of Consumption on Production”.”

    This is one of my favorite essays.

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