Some good sense on Chinese consumption

I agree with almost everything Yukon Huang says in this piece, “How China’s Consumption Matters,” though he is more optimistic than I am that 7% GDP growth is sustainable for China. The obsession of many economic commentators with “rebalancing” and the consumption share of GDP is largely beside the point.

China’s future growth rate will be largely determined by what the sustainable rate of investment and productivity growth turns out to be. Trying to boost consumption with subsidies or “stimulus” will help only in the short term, if that. This means that the most important reforms are the ones with the potential to increase high-return investments by the private sector–for instance liberalizing service sectors and overhauling state-owned enterprises.

Here’s some excerpts from Yukon’s article:

A country’s gross domestic product grows with increased investment and productivity, and to a lesser extent with growth in the labor force. Consumption doesn’t drive growth. It’s the result of growth.

Household consumption’s share of the Chinese economy, for instance, is around 35%—the lowest of any major economy. Yet over the past decade per-capita consumption in China has increased by about 8% to 9% in real terms after adjusting for inflation—multiples faster than any other developed economy and on average twice that of developing economies. …

What’s important, then, is the maximization of consumption’s growth over time, not its share of GDP in the near term. …

The challenge now is to increase productivity through reforms so that moderately rapid growth and continued increases in personal consumption can be sustained. Whether consumption as a share of GDP rises or falls is incidental. It should not be seen as an objective in its own right.

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