Question

Why is the consumption share of China's economy is low? What policies should the Chinese government take to promote consumption?

Answer 1

The composition of China’s growth is unbalanced. The country's low consumption rate is mainly due to the government’s growth model that forces up savings of household in order to finance industrialization rapidly. The fall in consumption’s share of GDP is largely because of the increase in the household savings rate and decline in household income’s share of GDP. Aggressive rise in spending by government and investment by state-owned enterprises has lead to an impact of weak exports. However these gains fails to match by comparable rise in private consumption

The government must promote consumption to “rebalance,” as it is vital to shift a bigger output share to households and convince them to save less. The government policies should make adjustments to reallocate distribution of income - how much goes to citizens, how much to enterprises, and how much to governments. It is macroeconomic adjustment which needs to be achieved with new fiscal policies, inclusive of the changes in taxation policy