China’s Unwilling Consumers

LONDON – For several years, Chinese leaders have been pursuing economic “rebalancing.” The country’s longstanding growth model, based on investment and exports, is to be replaced by one based on services and domestic consumption. It’s a necessary transition for China. Unfortunately, consumption-led growth remains a distant prospect.

Yes, the contribution of domestic consumption to GDP has risen slightly over the last few years. But that mainly reflects weak investment demand, not strong consumption growth. In fact, wealth accumulation remains the primary objective of Chinese households. And, given China’s economic structure, under-developed financial market, and weak welfare state, high levels of precautionary saving will persist for the foreseeable future.

Indeed, one key factor impeding consumption is the imperative faced by China’s older workers to save for retirement. In the past, the Confucian tradition of filial piety meant that children supported their parents in their dotage. But, after more than three decades of the one-child policy, retirees cannot reasonably expect nearly as much support, and China lacks a strong pension system to pick up the slack.

As it stands, urban retirees derive about half of their income, on average, from family support. But middle-aged workers know to expect less when they retire. Even the elderly are increasing their savings, owing partly to longer life expectancy and a surge in medical costs. This contrasts sharply with rapidly declining savings rates among the elderly in the United States.