A Healthy Path to Chinese Consumption Growth

CAMBRIDGE – China’s economic policymakers want to shift the country’s production away from exports and heavy industry, and to increase the share of consumption in GDP. A relatively simple institutional change to encourage health-care insurance could do much to promote the latter goal.

A higher level of consumer spending would raise the average Chinese family’s standard of living, a primary component of what China’s leaders now call the “Chinese Dream.” Faster growth in consumer spending would also reverse the recent slowdown in GDP growth, providing the extra demand needed to create employment for the millions of Chinese who are leaving agriculture and the millions more who are graduating from the country’s universities.

Consumer spending in China now accounts for just 36% of GDP, about half the consumption share of GDP in the United States and Western Europe. This remarkably low level reflects both the small share of household income in total GDP and the high rate of household saving.

Chinese officials hope that higher household incomes will boost consumer spending, as the tightening labor market causes wages to rise and as urbanization shifts workers from low-productivity farm work to higher-wage employment in the cities.