Determinants of China’s Private Consumption: An International Perspective

IMF Working Papers, April 1, 2010

Source details

Canonical URL: Determinants of China’s Private Consumption: An International Perspective

This paper gauges the key determinants of China's private consumption in relation to GDP using data on the Chinese economy and evidence from other countries' experiences.
The results suggest there is nothing "special" about consumption in China.
The core challenge is to explain why the conditioning variables—notably a low level of service sector employment, the level of financial sector development, and low real interest rates—are so different in China relative to other countries' historical experience.

Consumption behavior in China is not intrinsically unique compared with other countries' historical experience.
Conditioning variables identified as driving the low consumption share include:
- a low level of service sector employment,
- the level of financial sector development,
- low real interest rates.
Policies and structural factors that have the strongest association with higher consumption include:
- higher household income,
- a larger share of employment in the services sector,
- more developed capital markets, including liberalizing interest rates and creating alternative savings instruments.
Other mechanisms with a role in raising consumption:
- improving the healthcare system,
- improving the pension system,
- other measures to raise household income and mitigate household-specific risk.

Efforts to further raise household income are likely to have a significant impact on private consumption.
Expanding employment in the services sector is likely to raise the consumption share of GDP.
Developing capital markets is recommended, including:
- liberalizing interest rates,
- creating alternative savings instruments.
Strengthening social safety nets (healthcare and pension systems) can mitigate household-specific risk and support higher consumption.