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Wednesday, May 22, 2024

The underestimation of Chinese consumption by economists

The Role of Chinese Consumption

Adam Smith once pointed out that “consumption is the sole end and purpose of all production.” However, this idea hasn’t had much influence in China. According to the country’s statisticians, household consumption only accounted for 37% of China’s GDP in 2022, its lowest level since 2014.

Despite the lifting of COVID-19 controls, adjustments to Chinese data may reveal that household income and consumption are actually higher than reported, and have risen more quickly than previously thought. For almost two decades, Chinese policymakers have been working to rebalance the economy from exports and investment towards spending on more immediate gratifications. However, progress has been slow.

Advocates of rebalancing have identified two main problems: Chinese households save a lot of their income, and their income is too small a slice of the national cake. Addressing these issues will involve shifting wealth and power to ordinary people. While many have championed this approach, current leader Xi Jinping seems more focused on broader ambitions for China’s production beyond just consumption.

Economists argue that China’s figures likely understate household earnings and spending. Surveys likely fail to capture the unreported “grey” income of the wealthy, and national accounts may underestimate the implicit “rent” that homeowners pay themselves. China also struggles to account for goods and services provided by the government at little or no cost, such as education, healthcare, and subsidized food.

In recent years, the country’s statisticians have started to improve their reporting of social transfers in kind, such as health and education benefits, making international comparisons with other countries easier. These social transfers have raised China’s share of household income to 69% of national income, placing it near the bottom of the pack, but not at the very bottom. This has made Mr. Xi’s rebalancing record more promising than previously thought.

In conclusion, while improvements in China’s reporting of household income and consumption paint a more promising picture for rebalancing, the country still has room to grow in terms of social transfers in kind. If Mr. Xi objects to the commercialization of Chinese society, he could focus on providing more of the things that he thinks his citizens should be consuming, without fully embracing consumerism.

The evolving picture of Chinese consumption and income highlights the complexities of rebalancing the economy. It also offers an intriguing glimpse into the broader economic ambitions of China’s leadership. This is a story The Economist will continue to monitor closely over the coming months.

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