China: Fastest Growing Consumer Market in the World

IMF Blog, December 2, 2013

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Author: Steven Barnett
Date: December 2, 2013
Seasonal references: Cyber Monday (United States), Singles Day in China (November 11 or 11/11)

China had the largest consumption increase in the world in 2011 and 2012, and likely to be true again in the year of publication.
The chart (referenced) shows:
- US$ increase of consumption (bars) and real consumption growth (dots).
- China has been “tops for the past few years” on the US$ increase metric and has “had the fastest real growth in consumption.”
- Exchange rate appreciation contributes to the large measured increase in US$ for China, and contributes to the negative bar for Japan that year.
In real terms, consumption has grown about 9 percent a year for the past decade.
GDP has grown about 10 percent on average over the same period; thus consumption growth, while strong, has been slightly below GDP growth.
Consumption as a share of GDP has fallen by some 10 percent of GDP over the past 10 years or so.

Household saving has been rising; precautionary motives are a popular explanation.
- Households are uncertain about how much health, education, and pension the government will provide, so they self-insure by increasing saving.
Household income has been growing slower than GDP; household income has been growing fast, but “just not as fast as GDP.”
Both factors (higher saving and slower household income growth relative to GDP) contribute to the declining consumption-to-GDP ratio.
These factors are discussed further in “Sino-Spending” (referenced).

Rebalancing toward more consumer-based growth means boosting the consumption to GDP ratio.
Consumer-based growth can be told from the supply-side: expanding the service sector is critical.
- The service sector, while growing, is smaller in China in terms of output and employment than comparator economies.
- As the service sector takes a larger share of the economy, household income (and thus consumption) will naturally rise as a share of GDP.
- Advances in the service sector could lower prices for many consumer services and thereby increase sales (consumption) — see IMF Working Paper (referenced).

Strengthen the financial sector:
- Would help finance expansion of the service sector, which currently has difficulty accessing credit.
- Would boost household income directly as new financial products boost investment income.
Social security reform:
- Could help reduce precautionary saving.
Reduce payroll tax burden:
- Payroll taxes are described as “very high and regressive” — employee plus employer social contributions often exceed 40 percent of wages.
- Reducing contribution rates would boost labor income directly through lower taxes and indirectly by boosting employment.
Other reforms from the recent Third Plenum that will help lift the consumption ratio:
- Higher resource taxation.
- Labor market reforms.
- Land reform.
- These can boost household income and lower household saving—either directly or indirectly by shifting the economy more toward services.

As reforms take hold, the consumption to GDP ratio should rise.
This shift is a by-product of moving to a more balanced and sustainable growth path, producing:
- A larger service sector.
- Lower household saving rates.
- A higher labor share of income.
- More inclusive outcomes (improved labor market).
- A more environment-friendly growth path (services are less polluting than industry).
If consumption grows faster than GDP, the result will be more consumer-based growth.

Source: China: Fastest Growing Consumer Market in the World — Steven Barnett (December 2, 2013)

中国：世界上增长最快的消费市场
- 中国：世界上增长最快的消费市场 (Markdown version)
- 中国：世界上增长最快的消费市场 (PDF)