Despite strong growth in Chinese consumption, the household consumption ratio has fallen significantly. This reflects a fall in the share of national income that accrues to the household sector and a rise in the household saving ratio. Policies to encourage the growth of small and medium-sized entities, increase social spending, and reduce the focus on investment-led growth would be expected to support the level of household consumption over the medium term.China; households; consumption; savings

David Orsmond

Mark Baker

English

Research Papers in Economics

13 Bulletin |  March  quarter 2010
other countries, with China’s real annual household 
consumption  growth  on  average  3  percentage 
points  higher  than  other  emerging  economies  in 
Asia  and  6  percentage  points  higher  than  in  the   
G7 advanced countries (Graph 1).
Despite this strong growth, the share of household 
consumption  in  China’s  total  expenditure  has 
declined.  For  many  years  this  trend  was  fairly 
gradual,  with  the  household  consumption  ratio 
falling from 52 per cent of GDP in the early 1980s to 
46 per cent of GDP by the end of the 1990s. However, 
the pace of the decline picked up noticeably in the 
2000s, with the household consumption ratio falling 
a further 11 percentage points, to be 35 per cent of 
GDP in 2008. In contrast, consumption ratios in other 
Despite strong growth in Chinese consumption, the household consumption ratio has fallen 
significantly. this reflects a fall in the share of national income that accrues to the household 
sector and a rise in the household saving ratio. Policies to encourage the growth of small and 
medium-sized entities, increase social spending, and reduce the focus on investment-led growth 
would be expected to support the level of household consumption over the medium term.
Household Consumption Trends in China
Mark Baker and David Orsmond*
Graph 1
-4
0
4
8
12
-4
0
4
8
12
Household Consumption Growth
Two-year average annual growth
* I ndonesia, Malaysia, Philippines and Thailand
** Hong Kong, Singapore and South Korea
Sources: CEIC; RBA; United Nations
2008
High-income economies**
%
ASEAN-4*
2004 2000 1996 1992
China
%
Introduction
Compared  with  other  countries,  household 
consumption  expenditure  in  China  has  grown  at  a 
strong pace for an extended period. Nonetheless, the 
share of household consumption in total expenditure   
in the Chinese economy has declined, as the growth 
in investment spending and exports has been even 
more  rapid  than  that  of  consumption,  especially  in 
the  2000s  decade. This  article  outlines  these  trends 
and the factors that have driven them, focusing on 
the  decreasing  share  of  total  national  income  that 
accrues  to  the  household  sector  and  the  increase 
in  the  household  saving  ratio.  It  also  discusses 
recent  government  initiatives  that  are  intended  to 
boost  consumption  spending  over  the  short  and  
medium term.
Recent Trends in Household 
Consumption
Household  consumption  has  grown  rapidly  in  China 
over the past two decades, averaging around 8 per cent 
a year and rising to around 10 per cent in the past few 
years.1 This is well above the pace recorded in most 
*  Mark  Baker  is  from  the  Asian  Economies  Research  Unit  and   
David Orsmond is from Economic Analysis Department.
1  The  Chinese  statistical  authorities  publish  estimates  of  nominal 
but  not  real  household  consumption.  The  estimates  shown  here 
are  those  of  the  United  Nations,  which  are  consistent  with  the 
authorities’ estimates for the real growth of total consumption by 
the government and household sectors and budget data. Retail sales 
data also show strong growth for an extended period.14 ReseRve Bank of austRalia
householD ConsumPtion tRenDs in China
emerging Asian economies have typically remained 
around 55–60 per cent of GDP over recent decades 
(Graph 2).
The fall in the consumption share in China has been 
accompanied by a large increase in the shares of 
investment and trade in GDP (Graph 3). Although 
household consumption has continued to grow at 
a solid pace, investment spending has grown even 
more rapidly and the contribution to growth from 
net  exports  has  also  increased  significantly.  This 
divergence  between  the  pace  of  real  growth  of 
consumption and that of all other spending has led 
to a reduction in the household consumption ratio 
by around 1 percentage point of GDP a year in the 
2000s; slower growth of consumption prices relative 
to  GDP  prices  reduced  the  ratio  by  an  additional 
½ percentage point a year during this period.
Changes in the Household Income 
Share and the Saving Ratio
Two broad factors account for the large fall in the 
share of household consumption in total expenditure 
during  the  2000s:  first,  a  decline  in  the  share  of 
national  income  that  accrues  to  the  household 
sector,  and  second  a  large  rise  in  the  household 
saving ratio.
According to recently published flow of funds data, 
which cover the period 1992 to 2007, the share of 
household disposable income in GDP has declined 
significantly, falling from around 66 per cent in the   
late  1990s  to  57  per  cent  recently  (Graph  4).2 
At  the  same  time,  the  shares  of  total  national 
income  accruing to  the  corporate  and  especially 
the  government  sectors  have  risen.  The  increase 
in  the  corporate  income  share  mainly  reflects 
developments  in  their  non-production  activities 
– lower costs following the termination in the late 
1990s of the requirement that enterprises provide 
social  services  to  their  workers,  higher  dividend 
income from their investments abroad, and lower 
net  interest  payments  –  while  the  increase  in 
the  government  income  share  is  due  to  higher   
tax receipts.
2  For further discussion of these data and recent saving patterns, see 
Wiemer (2009) and the accompanying articles in that issue.
Graph 2
0
20
40
60
0
20
40
60
Household Consumption Ratios
Share of nominal GDP
* I ndonesia, Malaysia, Philippines and Thailand
** Hong Kong, Singapore and South Korea
Sources: CEIC; RBA; United Nations
2008
High-income economies**
%
ASEAN-4*
2003 1998 1993 1988
China
%
1983
Graph 3
-10
0
10
20
30
40
50
-10
0
10
20
30
40
50
China – Expenditure Components
Share of nominal GDP
Sources: CEIC; RBA
2008
Gross fixed capital formation
%
Government
2004 1996 1992 2 000
Household consumption
Inventories Net exports
%
Graph 4
0
20
40
60
0
20
40
60
China – Disposable Income
Share of nominal GDP
Sources: CEIC; RBA
2007
%
Government
2003 1999 1995
Household
Corporate
%15 Bulletin |  March  quarter 2010
householD ConsumPtion tRenDs in China
The fall in the share of household disposable income 
in GDP reflects comparatively weak growth in non-
wage labour earnings and higher tax and interest 
payments. On the inflows side, almost 90 per cent 
of household income in China is derived from labour 
earnings, around half of which is wages and salaries 
from the formal sector and the other half is derived 
from  farm  production  and  other  unincorporated 
activities.  Wages  and  salaries  from  the  formal 
sector  remained  fairly  constant  at  around  30  per 
cent of GDP throughout the 1990s and 2000s, as 
strong growth in real wages offset modest growth 
in  formal  sector  employment  due  to  ongoing 
enterprise restructuring (Graph 5). In contrast, after 
rising during the 1990s, growth in income from farm 
production and unincorporated activities lagged the 
rapid pace of overall GDP by a wide margin, with its 
share  in  national  income  consequently  falling  by 
around 4 percentage points of GDP. Other inflows to 
the household sector – mainly pensions and other 
transfers received from the government and interest 
receipts  –  remained  quite  small  and  fairly  steady 
as  a  share  of  GDP;  dividend  income  paid  to  the   
household sector is negligible in China.
At the same time, outflows from household income 
increased  markedly  during  the  2000s.  Total  taxes 
on labour income rose by 2½ percentage points of 
GDP, partly due to higher income tax payments but 
mostly reflecting mandatory contributions to a new 
pay-as-you-go (PAYG) pension system managed by 
the  government  sector  that  is  being  phased  in 
across the country.3 In addition, household interest 
payments increased from near zero to 1 per cent 
of GDP after the widespread devolution of home 
ownership to the household sector in 1998 and the 
associated increase in mortgage-related debt. As a 
consequence of these developments, the share of 
household disposable income (after tax and interest 
payments) in overall GDP fell sharply.
3  Starting  from  the  year  2000,  the  government  has  been  gradually 
replacing enterprise-based pensions with a mandatory PAYG benefit, 
with employer contributions set at 20 per cent and employee at 8 per 
cent of nominal wages; see Dunaway and Arora (2007).
Graph 5
China – Household Income Accounts
Per cent of nominal GDP
0
10
20
30
0.0
1.5
3.0
4.5
2007
Wages and salaries
% Inflows Outflows
Sources: CEIC; RBA
Farm and
unincorporated income
Interest receipts
and dividends
Transfers
Taxes – social
security
Taxes – income
Interest
payments
2002 1997 2007 2002 1997
%
1992
Graph 6
10
15
20
25
30
35
10
15
20
25
30
35
China – Household Saving Ratios
Sources: CEIC; RBA
2007
%
As a share of disposable income
2003 1999 1995
As a share of GDP
%
The second factor behind the comparatively slower 
pace of consumption growth has been the increase in 
household savings in the 2000s. After dipping in the 
late 1990s, the household saving ratio has increased 
steadily, rising from 27 per cent of disposable income 
at the start of the decade to reach a historic high of 
38 per cent recently (Graph 6). This partly reflects 
demographic  factors;  China  is  at  a  peak  in  terms 
of  the  size  of  its  working-age  population  share, 
which is projected to decline over the next decade. 
But it also reflects an increase in the desired stock 
of savings ahead of future spending on big-ticket 
items such as children’s tertiary education, medical 
care, care of ageing parents and housing, especially 16 ReseRve Bank of austRalia
householD ConsumPtion tRenDs in China
in light of the termination in the late 1990s of the 
requirement that enterprises provide some of these 
services to their workers. The increase in the level of 
household savings needed to make these types of 
purchases can be considerable: with regard to home 
purchases  alone,  owner-occupiers  are  required  to 
place a deposit equal to at least 20 per cent of the 
purchase price, although the average is much higher 
and many home buyers pay fully in cash.
These changes in household income and behaviour 
in  the  past  decade  have  had  a  marked  effect  on 
expenditure patterns in China. First, the devolution 
of home ownership resulted in a near doubling in 
the share of dwelling investment to GDP between 
the  late  1990s  and  the  early  2000s,  effectively 
representing  an  increase  in  spending  by  the 
household sector on housing at the cost of lower 
spending on non-housing consumption during this 
period (Graph 7).4 Second, the rise in the corporate 
income share in part funded the large increase in 
business investment, especially given the absence of 
any dividend transfer requirement by state-owned 
companies  and  of  alternative  attractive  saving 
instruments.  Third,  much  of  the  increase  in  tax 
collections by the government in the early 2000s was 
channelled into higher publicly funded investment. 
4  Chinese consumption data do not include an implicit rent component 
to reflect the ongoing value of dwelling services.
Finally, given the increase in productive capacity that 
resulted from the higher level of business investment, 
rapid growth in exports relative to imports increased 
the trade surplus as a share of GDP, especially after 
2004. All of these factors contributed to the recent 
large  decline  in  the  consumption  to  GDP  share   
in China.
Policies to Lift Household 
Consumption
Over  recent  years,  the  Chinese  authorities  have 
taken  a  number  of  steps  to  support  household 
consumption. Some of these measures have a short-
term focus, while others are more structural in nature 
and  involve  a  gradual  rebalancing  of  economic 
growth  away  from  investment  and  exports  and 
towards higher consumption.
With regard to short-term policies, the VAT on cars 
and a number of other items has been reduced, and 
vouchers  for  certain  durable  goods  purchases  by 
the rural sector have been provided, in the context 
of  the  current  stimulus  package.  Several  of  these 
policies have recently been extended. Sales of these 
items have increased in the past year or so, although 
as  was  noted  in  the  November  2009  Monetary 
Report of  the  People’s  Bank  of  China,  part  of  this 
demand likely reflects a pull forward in the timing of   
such purchases.
With  regard  to  medium-term  policies,  the 
government  has  taken  a  series  of  steps  that  are 
likely  to  moderate  the  high  household  saving 
ratio and support consumption growth over time. 
Government spending on health and education has 
increased from around 23/4 per cent of GDP in 2006 
to around 33/4 per cent of GDP by 2008, while the full   
phase-in of the government PAYG pension system 
noted earlier will gradually lift the level of pension 
transfers to the household sector. The government 
also intends to phase in a national health system and 
rural-sector  pensions  and  has  introduced  policies 
to enhance the portability of pension entitlements 
across provinces. The health care program includes 
plans to develop a universal basic health insurance 
Graph 7
0
5
10
15
20
25
0
5
10
15
20
25
China – Investment
Share of nominal GDP
Sources: CEIC; RBA
2007
%
Corporate
2003 1995 1999
Household
Government
%17 Bulletin |  March  quarter 2010
householD ConsumPtion tRenDs in China
system for urban residents, new rural cooperatives, 
and improvements in health care infrastructure and 
pharmaceutical provision. The rural pension will be 
paid to citizens aged over 60 years regardless of their 
contribution period, with the system phased in from 
end 2009. Credit availability to the household sector 
is also rising, reducing the need for saving in advance 
of big-ticket purchases and for precautionary saving 
by the household sector. These policies will, however, 
likely  take  some  time  to  have  a  significant  effect 
on  the  household  saving  ratio;  the  level  of  social 
spending still remains low by international standards 
and  there  are  several  intergovernmental  issues  to 
address to ensure the various new initiatives are fully 
financed over time.5
Several  policies  are  also  being  implemented  or 
discussed to boost the level of wage and non-wage 
income of the household sector. The government 
has introduced measures to stimulate the growth 
of  small  and  medium-sized  enterprises  (SMEs), 
including  guarantees  on  their  borrowing,  tax 
reductions and subsidies. SMEs are typically a large 
share of total employment in other countries and 
hence their expansion – especially in the retail and 
wholesale sectors, which are dominated by state-
owned  enterprises  in  China  –  could  significantly 
boost  both  employment  and  household  income 
over  time.  Other  options  to  promote  the  growth 
of  SMEs  include  the  simplification  of  licensing 
arrangements and the development of risk-pricing 
and management practices in the banking sector 
to  better  assess  SME  loan  applications.  Greater 
competition  and  interest  rate  liberalisation  within 
the  financial  sector  could  also  raise  interest  rates 
on  the  sizeable  pool  of  household  deposits 
and  thereby  boost  the  low  level  of  non-wage   
household income.
5  The  intergovernmental  reform  in  1994  centralised  revenue  flows 
while leaving responsibility for much expenditure at the local level. 
Additional  social  expenditures  were  added  as  responsibilities  of 
the local administrations in the late 1990s and only part of the new 
rural  pension  will  be  paid  by  the  central  government,  with  the 
share  varying  by  province.  For  further  details  on  these  measures 
and a discussion of intergovernmental funding issues, see Qiao and   
Song (2009) and Dabla-Norris (2005).
Finally, to help rebalance income and expenditure 
shares across the economy, several commentators 
have  suggested  that  dividend  distributions  from 
state-owned  enterprises  be  increased  in  order  to 
finance  higher  government  social  spending  and 
transfers and reduce the level of retained earnings in 
these enterprises.6
Conclusion
While  household  consumption  has  continued 
to  grow  solidly  in  China,  its  share  in  GDP  has 
declined. This has been associated with a sharp fall 
in the share of disposable income accruing to the 
household sector and a rise in the household saving 
ratio. The  authorities  are  putting  in  place  policies 
to promote SMEs and increase social spending by 
the government, and are discussing other ways to 
reduce the focus on investment-led growth. While 
there are complex issues to address in each of these 
areas, they could over time have a substantive impact 
on household consumption in China.  R
References
chinaStakes (2007), ‘Pay Dividends’, 13 December.
Dabla-Norris e (2005), ‘Issues in Intergovernmental Fiscal 
Relations in China’, IMF Working Paper No 05/30.
Dunaway  S  and  V  arora  (2007),  ‘Pension  Reform  in 
China: The Need for a New Approach’, IMF Working Paper   
No 07/109.
Kuijs L, W Mako and c Zhang (2005), ‘SOE Dividends: How 
Much and to Whom?’, World Bank Policy Note, 17 October.
qiao h and Y Song (2009), ‘China’s Savings Rate and its 
Long-Term  Outlook’,  Goldman  Sachs  Global  Economics 
Paper No 191.
Wiemer  c  (2009),  ‘The  Big  Savers:  Households 
and  Government’,  China  Economic  Quarterly,  13(4),   
pp 20–25.  
6  From  2008,  all  non-financial  state-owned  enterprises  pay  a 
dividend varying between 5 to 10 per cent of their profits to the 
State-Owned  Assets  Supervision  and  Administration  Commission; 
these funds are held by SASAC to cover expected future enterprise 
restructuring costs, such as pension obligations. For a discussion, see   
ChinaStakes (2007) and Kuijs, Mako and Zhang (2005).18 ReseRve Bank of austRalia

China’s Savings Rate and its Long-Term Outlook’, Goldman Sachs Global Economics Paper No 191.

Pension Reform in China: The Need for a New Approach’, IMF Working Paper No 07/109.

The Big Savers: Households and Government’,

W Mako and c Zhang (2005), ‘SOE Dividends: How Much and to Whom?’, World Bank Policy Note,

Household Consumption Trends in China

http://www.rba.gov.au/publications/bulletin/2010/mar/pdf/bu-0310-3.pdf

Household Consumption Trends in China

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics