Consumer Spending in China: The Past and the Future

By Nie, Jun; Palmer, Andrew | Economic Review (Kansas City, MO), Summer 2016 | Go to article overview

Consumer Spending in China: The Past and the Future


Nie, Jun, Palmer, Andrew, Economic Review (Kansas City, MO)


After declining for nearly half a century, the share of consumer spending in China's GDP has recently increased. The rising consumption share has alleviated some concerns about slowing growth in China: economists and policymakers widely agree that the share of consumer spending must increase for China to continue its economic development. Whether this trend is sustainable, however, is unclear.

Jun Nie and Andrew Palmer examine the key factors driving the recent uptick in consumer spending to evaluate whether China can truly become a consumption-driven economy. They find Chinese consumption growth will likely remain strong, at around 9 percent, over the next few years due to relatively stable income growth and an expected decline in the household saving rate. But in the long run, strong household income growth--which will depend heavily on China's current supply-side reforms to improve technology and investment--will be necessary for China to transition to a consumption-driven economy.

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After steadily declining for nearly half a century, the share of consumer spending in China's GDP has recently increased. Economists and policymakers widely agree that the share of consumer spending must increase for China to continue its economic development; sustaining growth primarily on exports and investment will become more difficult in the longer run. Moreover, if China successfully rebalances economic growth toward a greater share of consumption, the global economy may benefit. Stronger Chinese demand boosts exports from the rest of the world.

Although the recent rise in the consumption share has allayed some concerns about slowing growth in China, it has also spurred discussion over whether this trend is sustainable and whether China will truly become a consumption-driven economy. Judging the future of consumer spending in China requires understanding not only what drove the recent rise in the consumption share but also what drove its past multi-decade decline. In this article, we analyze the effects of several long-term trends--most notably, changes in demographics and urbanization--as well as recent developments--mainly the housing boom after 2000. The analysis shows the decline in the consumption share from 1970 to 2000 is largely explained by Chinas rapidly aging population (which reflects both increased longevity and a large decline in birth rates due to the one-child policy) and fast urbanization. After 2000, however, the consumption share declined by more than would be expected from the country's demographic and urbanization trends alone. This discrepancy is likely due to rapidly rising housing prices since the early 2000s, which increased households' saving rate and slowed consumption growth.

Based on the analysis of the key determinants of Chinese consumption growth, we forecast consumption growth and its share in GDP for the next five years. In a benchmark scenario of relatively stable income growth and a further modest decline in the household saving rate, consumption growth in China remains at around 9 percent per year over the next five years, causing the share of Chinese consumption in GDP to increase by about 5 percentage points to 44 percent by 2020. This scenario has two implications. First, it suggests that strong consumption growth is sustainable in the near future, allowing China to continue transitioning toward a consumption-driven economy. Second, it suggests that strength in near-term Chinese consumption growth will partly rely on a further decline in the household saving rate. As the household saving rate cannot decline indefinitely, consumption growth may need to rely more heavily on household income to be sustainable in the long run.

Section I documents trends in Chinese consumption. Section II analyzes the determinants of Chinese consumption. Section III provides forecasts of future Chinese consumption growth as well as its share in GDP

I. …

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