## Determinants of China’s Private Consumption: An International Perspective

_IMF Working Papers, April 1, 2010_

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## Bibliographic details
- Authors: Kai Guo, Papa M N'Diaye
- Published: April 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451982701.001

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### Summary
- 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.

### Key findings
- 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.

### Policy recommendations and implications
- 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.

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