Sino-Spending

• Author: Steven Barnett, Alla Myrvoda, and Malhar Nabar
• Position: a Division Chief, is a Research Officer, and is an Economist, all in the IMF's Asia and Pacific Department.

Time for a pop quiz. In 2011, which country contributed the most to global consumption growth? Answer: China. Yes, the economy where consumption is almost universally considered to be too low contributed more to global consumption growth last year than the traditional front-runner in this category, the United States (see Chart 1).

This is a stunning development. But is it enough to reassure those who have long stressed that China should increase consumption to make its spectacular growth even more inclusive—which would also put the global economy on a more stable and sustainable path of expansion?

Low for long

The short answer is no. The fretters still have a point. Household consumption—the ultimate driver of self-sustaining growth—continues to remain low as a share of China’s GDP (see Chart 2). China’s ratio is well below that of countries at a similar income level and of other Asian economies. It is also low relative to the historical experience of other fast-growing economies, such as Korea and Japan, where consumption fell as a share of GDP during the early part of their miracle years. What’s different about China, though, is that household consumption as a share of the national economy was relatively low to begin with and has continued to decline further (see Chart 3). China’s large contribution to world consumption growth therefore results from its aggregate economy growing faster than that of other major economies, which are still working off the excesses of the pre–financial crisis binge, and not from an increase in China’s household consumption as a share of its own economy.

Much of the drop in China’s consumption-to-GDP ratio can be traced to the decline in household disposable income as a share of GDP (Aziz and Cui, 2007). As the economy has become more capital intensive during the period of rapid growth, corporate earnings have risen and household disposable income as a share of GDP has dropped. Importantly, the low consumption ratio is well explained by attributes of China’s economy, including the relatively low level of service sector development, financial underdevelopment, and low real interest rates compared with other economies (Guo and N’Diaye, 2010).

Playing it safe

The consumption decline also reflects a rise in household saving rates. In the mid-1990s, the urban household saving rate was less than 20 percent of disposable income. Last year, it passed 30 percent. The rural household saving rate has risen over this...