China’s low consumption ratio presents puzzle

China faces a policy trilemma in trying to raise its consumption relative to GDP, S&P said in a report.

Despite its record of impressive growth over several decades, the Chinese economy is widely regarded as having structural shortcomings. In particular, China invests too much, grows too fast, saves too much - and therefore consumes too little.

“China’s ratio of private consumption to GDP is by far the lowest of any major economy at about 35 percent,” said Paul Gruenwald, Asia-Pacific chief economist for Standard & Poor’s.

The average ratio for emerging Asia is about 55 percent, and the average for members of the Organization for Economic Cooperation and Development — a group of 34 countries founded in 1961 to stimulate economic progress and world trade — is above 60 percent.

“China’s low ratio means that the share of the economic pie going to consumers is too small,” said Gruenwald.

A common criticism of China’s “built for speed” growth model is that progress has come at the cost of repressed private consumption. The authorities are aware of this issue, and growth rebalancing is an often-mentioned policy objective, including in the Party Plenum concluded recently.

“Using a simple framework, we find that China faces its own version of the ‘policy trilemma’: It cannot simultaneously achieve high GDP growth, a rising consumption-to-GDP ratio and a current account surplus,” Gruenwald said. “In setting its policy objectives, China cannot have it all.”

Productivity-enhancing reforms can help ease the transition to a higher consumption ratio, but cannot solve the “trilemma”, the report said.

Since China can only achieve two of its three objectives, it has limited options: the current path of high growth, an external surplus and a low consumption-to-GDP ratio; much slower growth, an external surplus and a faster-rising consumption-to-GDP ratio; or moderately slower growth, an external deficit, and a moderately rising consumption-to-GDP ratio, according to S&P.