Catalyzing Consumption and Balancing Growth

WASHINGTON , DC – China has weathered the Great Recession well. The world now waits to see if last year’s impressive domestic demand growth can be sustained, and if China can, in the words of Prime Minister Wen Jiabao, “give full play to the leading role of…consumer demand in driving economic growth.”

The Chinese consumer has been held back for too long, and now must be put front and center in China’s growth model. China’s government is already moving ahead on multiple fronts to attain this goal as was clear from announcements at this week’s National People’s Congress.

Of the many factors that have decreased the share of consumption in China’s economy, declining household disposable income has been central. That, in turn, has reflected the fall in labor income as a share of the economy, owing in part to structural changes that have moved workers out of agriculture (where the labor share of income is high) and into manufacturing (where capital commands a larger share of income).

Concurrent with diminishing labor income, government-imposed ceilings on bank deposits – the primary savings vehicle for most households – have held down household capital income. This fall in income has been magnified by rising household savings rates, driven by insufficient insurance for health care and old age, the high cost of education, growing income inequality, and demographic trends.