Explaining China’s Low Consumption: The Neglected Role of Household Income
IMF Working Papers, July 1, 2007
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Bibliographic details
- Authors: Jahangir Aziz, Li Cui
- Published: July 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451867459.001
Executive summary
- The paper examines why the share of consumption in total expenditure in China has been low and declining despite high GDP growth.
- Contrary to a widely held view, the rise in the household saving rate since the mid-1990s is found to have been a minor factor in low consumption.
- A much larger factor is the declining share of household income in national income, occurring across wages, investment income, and government transfers.
- Financial sector weaknesses, by restricting firms' access to bank financing for working capital, have played a quantitatively major role in keeping wage and investment income shares low and on a declining trend.
Key findings
- The rise in the household saving rate since the mid-1990s is a minor contributor to the low and declining consumption share.
- The dominant factor is the declining household income share in national income:
- Declines observed across wages.
- Declines observed across investment income.
- Declines observed across government transfers.
- Financial sector constraints that limit firms’ access to bank financing for working capital are quantitatively important in depressing wage and investment income shares.
Policy-relevant implications
- Rebalancing China’s economy toward higher consumption likely requires measures that raise the household income share in national income, not only policies aimed at reducing household saving rates.
- Addressing financial sector weaknesses that constrain firms’ working capital financing could help restore wage and investment income shares and support higher consumption.