In this episode of China Money Podcast, we hear special speaker Yukon Huang, senior associate at Carnegie Endowment, analyze China’s unbalanced economy. Is it really a problem, or is it a virtue?
On the declining consumption-to-GDP ratio in China:
People are very concerned about China’s consumption’s share of GDP. It has been falling to 35 percent, the lowest among any major economies. China’s investment’s share of GDP has been growing at above 45 percent now, the highest among major economies.
Obviously, people find it to be a problem. The discussions in the media and academia, even inside the Chinese government, are how do we stimulate consumption. But there are some problems here. We also see the growth of China’s consumption per person is the highest in the world. Eight percent compounded for decades. It’s much more rapidly than India, South Korea, Brazil and other middle-income countries.
So, is the low share of consumption to GDP a problem? I say: not really.
If you compare China to three star performers: Japan, Taiwan and Korea. We see that they have all went through this decline (of consumption-to-GDP ratio). They all had a significant unbalanced growth phase in their development.
I will explain why. The country that had the most unbalanced growth, in terms of the consumption-to-GDP ratio falling, is the U.S. It’s share of consumption to GDP fell 40 percentage points from 1930 to 1950. It’s the most unbalanced economic growth ever recorded in economic history. But it made the U.S. a global super power.
So, unbalanced growth is actually associated with tremendous economic strength, rather than a liability.
Why does this unbalanced growth happen?
We have to answer first what determines household consumption. There are two variables. Household consumption is depended upon its income and its savings. A falling consumption’s share to GDP has something to do 1, household income’s share of GDP is falling; 2, household savings’ share of GDP is increasing.
We can see that personal income as a share of GDP in China has been falling. And, that is the consequence of unfinished urbanization in China. Think about this. I’m a poor farmer in China. I grow 100 dollars of rice. That’s my total income. Ninety dollars goes to me as the labor and owner. Ten dollars goes to interests and other costs.
Now, I can’t make a living and decides to leave for the city for a job in the factory. I get paid 300 dollars. Of that industrial output at the factory, no more than 40 percent comes to me (the labor). The rest is capital, property, etc. I’m better off, and China’s economy is better off.
But what happens to disposable household income to the size of the GDP? It falls. Because 90 percent of what I produce goes to the household before, but now only 40 percent goes to the household. And more and more people move from the countryside to the cities, the share of household income to GDP declines. And that’s a good thing.
At the same time, savings rate in China has jumped up a lot in the last ten years. We’ve done surveys that indicate savings rate only goes up in urbane areas, not in the rural areas. That’s because migrant workers save 40 to 45 percent of income. Established people in big cities save to 20 to 25 percent.
Migrant workers account for 40 to 50 percent of labor force in the cities, and their income has come up a lot. They explain the totality of the savings rate in China. Why do migrant workers save more? They can’t buy houses. They don’t have medical insurance, social security, etc. It’s like people in jail save more than people who are not.
What is the solution to China’s unbalanced growth?
In terms of China’s trade surplus, if you give migrant workers Hukou, China will be a trade deficit country.
About Yukon Huang:
Yukon Huang is the senior associate at Washington D.C.-based think tank, Carnegie Endowment, where he researches on China’s economic development and its impact on Asia and the global economy. He was the World Bank’s China director from 1997 to 2004, and also served at the U.S. Treasury previously. Mr. Huang holds a B.A. from Yale University and a M.A. and Ph.D. from Princeton.