China struggles with low domestic consumption

Source : Daily World

The Chinese economy has grown rapidly. Its exports dominate the world trade and its trade surplus and foreign reserves dwarf those of any other country. Yet, there is something unsettling about the state of the economy of a nation where the exports represent a very high percentage of its gross national product (GNP). Over the last two decades, the share of household income in the GNP has declined and China’s household consumption as percentage of GNP is the lowest among other large economies. This was not always the case. A 2003 paper titled “why China’s economy can sustain high performance” by the Royal Institute of International Affairs concluded that “domestic consumption will remain the major driving force of China’s economic growth… The contribution of external demand to China’s growth is marginal”. 19 years later, in January 2022, Michael Pettis, a finance professor at Peking University wrote in the Financial Times about China’s struggle to increase domestic consumption. In his opinion, it is true of all countries that persistently run trade surpluses, whether high wage countries like Japan and Germany or lower wage ones like China and Vietnam, that their international competitiveness is rooted in wages being lower than the productivity of the workers. This results in household incomes and consumption not increasing as rapidly as the GDP. Exports and investment have to rise faster than the GDP growth rate to sustain the economy.

As early as 2007, an IMF paper had warned of this trend in the Chinese economy. The working paper, “Explaining China’s Low Consumption: The Neglected Role of Household Income” says that “the share of consumption in total expenditure has been low and declining” mainly because of the declining share of household income in the national income due to lower wages, among other reasons. Both Michael Pettis and the IMF paper supported the view that though higher household savings were one of the causes of lower share of household consumption but lower share of household incomes remained the dominant cause. The US Congressional Research Service published a paper on April 6, 2022 that gave the private consumption of Chinese households as 37 percent of the GDP describing it as a “low share for an economy of China’s size and top global trade position”. The paper says that China relies on government spending and exports to boost the growth rate of the economy.

Of course, the high domestic saving rate is also a factor in suppressing household consumption in China. There are several reasons, unique to China, for an exceptionally high saving rate for the households, the biggest being the one-child policy that was abandoned only recently., The filial duty of an offspring towards parents is deeply embedded in the Chinese society and therefore, when the number of children was larger, people did not bother about creating a safety net for old age through higher savings. Studies have shown how the domestic savings rate jumped with the introduction of the one-child policy. In most of the world, the saving rates of the bottom 10 percent are negative showing state transfers to this group while in China this segment saves 20 percent of the household income. The other important reason was the economic liberalisation started with Deng’s reforms and the simultaneous contraction of the worker welfare allocations by the state. In order to encourage private investment, regulations remained lax and this resulted in a weak obligation cast by law on the employers to ensure a worker’s old age financial safety net This also prompted higher savings and reduced consumption. The corporate profits were retained for investment and very little was shared with the investors reducing household incomes. Many Chinese had bought an additional house for speculative reasons by raising a loan. The real estate market crash has caused a steep decline in the value of the investment, further resulting in a cut on domestic consumption. The lockdowns hit the wageworkers the hardest, reducing many of them to subsistence level if not to actual starvation.

This scenario compelled Xi Jinping to announce the “Dual Circulation Strategy” in May, 2020 at the CCP Politburo Standing Committee and it is now part of China’s 14th Five Year Plan. It aims at reducing China’s dependence on exports, focussing on high value-added products for export and increasing the share of domestic consumption in GDP. So far, the policy has failed to achieve these goals. The pandemic has exacerbated China’s dependence on exports to even partly sustain its massive production capacity as household incomes and consumption plummeted. A study by the think tank “China Power” shows that 2020 and 2021 have seen export-led growth in China, with exports contributing 25.3 percent and 20.9 percent to the growth of GDP in these years respectively. A large part of this increase has come from inflation and a lesser part from increased volumes. Meanwhile, household consumption fell from 39.1 percent of GDP in 2019 to 37 percent in 2021 while the global average is around 60 percent. Retail sales had shown signs of recovery in 2021 but fell again in March this year due to a lockdown in several major urban centres. China’s GDP per capita is similar to Brazil and yet, China’s household consumption per capita is comparable to Nigeria.

All this shows the perils of putting too much in store by the wisdom of one dictator. In a long article written in the July, 2021 issue of Qiushi, the bimonthly magazine of the CPC Central Committee, Xi Jinping reproduces at dozens of places lengthy quotes from his own speeches given on various occasions, using the first person pronoun “I”. He mentions Confucius and Mao but does not mention any of the current scholars and economists in China. “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era”, usually abbreviated as Xi Jinping Thought, was incorporated into the Constitution of the Chinese Communist Party in 2017.

In the next year, the preamble of the People’s Republic of China was amended to include these gems of Xi’s thoughts. Since then, these thoughts have become an immutable part of China’s economic policy till Xi himself may desire to modify any part of these musings. It was the same earlier with Mao’s thoughts with disastrous consequences for China. One of Mao’s wisdom was that sparrows are harmful for agriculture and this led to the extermination of sparrows with the state buying dead sparrows by weight. It resulted in the Great Famine in China that caused the death of 50 million people. Food shortages are already threatening China and had led to Xi Jinping’s short-lived “Clean Plate campaign” in 2020. The thoughts of this “new Mao” once again portend disasters for China.

The writer RN Prasher is a retired IAS officer of Haryana cadre | Personal Opinions

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