1/17 I'm all in favor of myth-busting but this article seems to miss the point. To my knowledge, and contrary to Sharma's claim, no one has ever argued that the consumption share of China's GDP is low because consumption has grown slowly. https://www.ft.com/content/bf1...
2/17 The argument has always been that consumption and household income have grown much more slowly than GDP because of a series of explicit and implicit transfers from households that subsidized growth in investment, especially investment in manufacturing and infrastructure.
3/17 For example, the biggest decline in the consumption share of GDP occurred in the first decade of this century largely because of extremely low interest rates – highly negative in real terms – that were engineered to resolve the cleaning up of the banking system.
4/17 At that time, the GDP deflator was 8-10%, and nominal GDP growth was 16-20%, but lending rates were 7-8% and deposit rates were 3-4%. This allowed the AMCs that had purchased bad debts from the banking system to resolve these bad debts over 10-20 years with minimum losses.
5/17 But these low rates represented transfers from household savers to banks and borrowers that equalled roughly 5% or more of GDP. Not surprisingly, during this time household consumption dropped from a very low 48% of GDP to an astonishingly low 34% of GDP.
6/17 Because of what was effectively a huge implicit tax on household savings, along with an equally large subsidy to banks and borrowers (almost none of whom were households), the inevitable result was a sharp drop in the household share of GDP along with a surge in investment.
7/17 This, in turn, explains most of the decline in the consumption share of GDP during that period. Add to this the fact that the hukou system prevented the social safety network from keeping pace with GDP growth even as it prevented wages from keeping...
8/17 pace with productivity growth, and it is easy to see why the household savings rate remained high even as the household share of GDP declined consistently, both of which pushed up the national savings rate and pushed down the household consumption share.
9/17 Other policies also matter. China's massive overinvestment in infrastructure since 2008-10 transferred resources from the country as a whole (again, mainly through low interest rates) to the businesses that benefitted from the consequent reduction in logistical costs.
10/17 More recently, the surge in manufacturing investment as China externalized the cost of the property crisis was another similar transfer, and explains why even as Chinese growth slowed sharply, the growth in consumption slowed even more.
11/17 Sharma says that "calls to free the Chinese consumer persist alongside mounting evidence of the steady growth in their spending", but this isn't true. The consumption share is still lagging. Last year for example, consumption accounted for a miserly 45% of...
12/17 GDP growth which – excluding 2020, when consumption contracted – is the lowest recorded in decades. It is more typical for consumption to account for 60% of China's GDP growth, which is already low in a world in which consumption typically accounts for 75% of GDP growth.
13/17 We will almost certainly see consumption lag again this year. For all the talk, in other words, the consumption share continues to decline even as growing subsidies boost manufacturing capacity well above the ability of Chinese consumption to keep pace.
14/17 Sharma argues that the problem is not too little consumption but too much investment, but these are simply two sides of the same coin. China overinvests for the same reason that it underconsumes – because of the extent of transfers from households that subsidize...
15/17 spending on infrastructure and, increasingly, manufacturing. To reverse these transfers will be extremely difficult because, as Sharma correctly notes, China has locked itself into GDP growth targets that are way too high.
16/17 But it is the only way to do either. Until Chinese households are able to see their total disposable income rise in line with their productivity, consumption must continue to lag growth, even as investment continues to lead growth.
17/17 I agree with him that a sustainable GDP growth rate is a lot closer to 2.5% than to 5%, but to separate the problem of underconsumption from that of overinvestment fails to recognize that both are a consequence of the same set of distortions. https://carnegieendowment.org/...