Why is the Chinese consumption level so low?

Why do Chinese consume so little? Fan Gang, a famous Chinese economist, believes it is because most Chinese have a very small disposable personal income. Chinese farmers have greatest consumption tendency and the lowest saving rate. This does not mean they are big spenders; rather, they have very little money. There are reasons for the high savings rate in China. The imperfect social security system and the inefficient capital market have led to an exorbitant savings rate.

The consumption rate has, however, continued to increase slowly. It has been stable at around 8 to 10 percent in recent years, and now it is above 12 percent. The low consumption percentage and high investment percentage in GDP is not because consumption growth has fallen, but because investment has grown too fast, the expanding proportion of which in GDP has dwarfed that of consumption.

How can we increase consumption rapidly? Unlike Americans, Chinese consume very little. It seems that if the Chinese consumed a little more, the disequilibrium problem in the world economy would be solved. However, GDP per capita in China is just over US$1000, whereas in America GDP per capita is nearly US$40,000, so it is impossible to draw a comparison between them. Chinese farmers spend all their money, and still they have no money to send their children to school and see the doctor. The farmer's issue is one for the whole economy - employment, development, investment growth and urbanization.

There are also reasons for China's high saving rate. The social security system is not perfect and the capital market is inefficient, leading to a high savings rate. It will take a couple of years to solve this problem and raise consumption levels.

Fan Gang also mentioned another problem - the large and ever-increasing income gap. Most workers are blue-collar on a low salary. This group has the highest consumption tendency and the lowest savings rate. Furthermore, their share of income is very low; they receive only 40 percent of the annual increase in GDP. Moreover, the GDP increase is calculated not by salary growth rates but by rural labor transfer. The consumption tendency is hard to increase by a significant margin. Only continuous economic development will resolve this problem.

By People's Daily Online