Household Income and Consumption

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"Household Income and Consumption"

Why is consumption such an incredibly low share of GDP in China? Michael Pettis says it’s because household incomes are shrinking relative to the size of the economy:

Chinese households are happy to consume, but they own such a small share of total national income that their consumption is necessarily also a small share of national income. And just as the household share of national income has declined dramatically in the past decade, so has household consumption. This isn’t to say households are getting poorer. On the contrary, they are getting richer, but they are getting richer at a much slower speed than the country overall, which means their share of total income is declining.

The solution to this would be “to engineer a huge shift of state wealth to the household sector, say in a massive privatization program” which, as Pettis says, “will be politically difficult to do.” I suppose that one alternative way of doing this is that instead of having the PBOC use Chinese surpluses to buy American financial assets and prop the dollar up, they buy made in America consumer goods and then give the goods away to China’s citizens. That seems too wacky for policymakers to seriously consider, but that doesn’t mean it wouldn’t be a good idea.

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