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China’s Rebalancing Imperative – Part 2

Stephen S. Roach, Project Syndicate. April 19, 2024.

Unleashing Domestic Demand

This is hardly the first time that China has had to cope with negative global shocks. Starting with the Asian financial crisis of the late 1990s and the dot-com recession of the early 2000s, and continuing through the 2008-09 global financial crisis and the more recent COVID-19 pandemic, China has used traditional countercyclical policy tools, both fiscal and monetary, to sustain rapid GDP growth. While attending the China Development Forum in the early 2000s, I remember discussing possible external shocks with then-Premier Zhu Rongji. His response – an investment-driven proactive fiscal stimulus – is still an important feature of China’s playbook.

But today, a major downturn in the Chinese property sector, amplified by a huge debt overhang, has eroded the potency of any investment offset, reducing considerably the possible benefits of countercyclical policies. That puts the focus squarely on the Chinese consumer.

It has long been obvious that household consumption as a share of the Chinese economy is far too low, as Figure 3 shows. The main culprit is the lack of a broad social safety net; provisions for retirement and health care are particularly inadequate. In the face of an uncertain future, aging Chinese consumers opt for fear-driven precautionary saving over discretionary consumption. Until this urgent challenge is addressed, under-consumption and excess saving will persist.

Moreover, China’s deeply troubled property market has added a new dimension to this dynamic, with falling home prices and reduced household wealth exacerbating the economic vulnerability that has held back private consumption. Taken together, these forces will continue to stymie Chinese rebalancing, an especially worrisome outcome for an economy in dire need of new sources of growth.

China’s lagging domestic consumption is at odds with the official government position on the state of the Chinese economy. According to the latest Statistical Communiqué of the People’s Republic of China, final consumption expenditure was estimated to have contributed 4.3 percentage points, or more than 80%, of last year’s 5.2% increase in total Chinese GDP – nearly three times the 1.5 percentage points contributed by gross capital formation.

These figures paint a surprisingly robust picture of consumption-led Chinese economic growth. The disparity with my depiction of Chinese under-consumption is largely technical, traceable to the United Nations System of National Accounts (SNA), the international standard for national income accounting.

The SNA measures final consumption as the sum of household consumption plus consumption of the “broader community” of businesses and government units. The latter two categories accounted for around 16 percentage points of Chinese GDP in 2022, according to the latest figures, which boosted SNA-based final consumption expenditure as a share of GDP to an estimated 53.2% in 2022, well above the 37.2% attributed to the household sector.

Consequently, when Chinese authorities boast about the newfound strength of consumption-led economic growth, it is important to understand that they are using a much broader metric of national consumption than I am. My focus is exclusively on household final consumption expenditure, a chronically weak segment of the Chinese economy that remains a prime candidate to drive the long overdue – and increasingly urgent – rebalancing.

While the arguments for consumer-led rebalancing are already well-established, the IMF’s latest Article IV consultation with China underscores this case. IMF researchers find that China’s household savings rate, roughly 33% in 2022, contrasts sharply with the median global household savings rate, which the Fund puts at around 12%. This likely reflects the pressure on asset prices – homes, yes, but also underwater equity holdings that are suffering through a wrenching