[Looking at China, January 13, 2023]The ultimate goal of economic development is consumption, and investment is only a means. Investment reduces consumption today in order to increase consumption tomorrow. Consumption is not only the purpose, but consumption also determines whether the investment has a return. If an economy invests more and consumes less and less, then the rate of return on investment will also decrease. Ultimately, investment without consumption support will be unsustainable.
However, observing the GDP demand structure of major countries from 2012 to 2021, China’s household consumption rate (resident consumption/GDP) is only a poor 38%, 18 percentage points lower than the global average, and the investment rate (capital formation/GDP) is high 19 percent. Compared with middle- and high-income countries at the same development stage, the consumption rate of Chinese residents is 9 percentage points lower, and the investment rate is 11 percentage points higher. Compared with high-income countries, especially the United States, the characteristics of low consumption and high investment are more obvious.
1. Two factors that determine the consumption rate of residents
A cross-country comparison of the GDP demand structure seems to show that the Chinese are the stingy Grandet described by Balzac, greedy for wealth, but frugal and penny-pinching. Are Chinese people really too “stingy”?
We can decompose the household consumption rate:
Resident consumption rate = Resident consumption/GDP = (Resident consumption/Resident disposable income) X (Resident disposable income/GDP) = Resident consumption propensity X Ratio of residents’ income to national income
Therefore, the level of residents’ consumption rate depends on two factors: first, consumption propensity, which is equal to the proportion of each yuan of disposable income used for consumption; second, the proportion of residents’ disposable income in national income.
Among the major countries in the world, the aggregate demand structure of China and the United States is just the opposite. China has high investment and low consumption, while the United States has high consumption and low investment. The problem can be found by comparing the income ratio and consumption propensity of residents in China and the United States. In the 20 years from 2001 to 2020, the average income of Chinese residents is only 61%, while that of the United States is 76%; the propensity of Chinese residents to consume is 63%, while that of the United States is 92%.
A simple calculation shows that, with a given propensity to consume, as long as the proportion of Chinese residents’ income rises to the level of the United States, the consumption rate of residents will reach 48%, which is comparable to the average level of middle- and high-income countries; Under the given circumstances, if the consumption propensity of Chinese residents is raised to the level of the United States, the consumption rate of Chinese residents will reach 56%, comparable to the global average.
So, which of the two factors, the low proportion of residents’ income and the low propensity to consume, has a greater impact on consumption? It is the former. Because the propensity to consume depends on income, if the income is high and the income is stable, the propensity to consume will naturally be high. Moreover, observing the data before the COVID-19 epidemic, it can be found that since the proportion of China’s working-age population peaked in 2010, residents’ propensity to consume has been rising, and correspondingly, residents’ propensity to save (savings/disposable income) has continued to decline.
The rise of the propensity to consume and the decline of the propensity to save after the human peak are in line with the life cycle theory: in the demographic dividend stage before the human peak, there are more working-age people who earn income and then save, so the overall propensity to consume and save in the resident sector declines. propensity to rise; after the population peak, the retired elderly population begins to consume their previous savings, which will inevitably lead to an increase in the propensity to consume and a decline in the propensity to save. However, counting from 2012 after the peak, the proportion of Chinese residents’ income has basically remained unchanged, and the data in 2019 is even lower than that in 2012.
Therefore, it is not because the residents do not consume because they are “stingy”. However, China’s economic growth has long ranked first among major economies, and its per capita GDP is only one step away from the level of high-income countries. So, where has the “money” gone? This involves the issue of income distribution.
2. Three types of income distribution
Income distribution is one of the eternal topics in economics. Some people think that dividing the cake seems to be an easy task compared with making a bigger cake. In fact, dividing the cake is also quite complicated. There are three divisions here: first, the distribution of national income among factors of production, especially between capital and labor; second, the distribution of national income among individuals within the household sector; third, the distribution of national income Distribution between residents, enterprises, government and other national economic sectors. Of the three divisions, the most difficult is the sectoral distribution of national income.
As far as the first distribution is concerned, in “Das Kapital”, the distribution relationship between capital and labor is described throughout. Due to the exploitation of labor by capital, the low-income working class lacks the ability to consume, which in turn leads to a surplus of capital. Based on this, some people also believe that the reason for the low proportion of Chinese residents’ income is that the proportion of labor compensation is too low, so increasing the proportion of labor compensation in national income has become a natural policy option. However, this view is debatable.
Indeed, labor compensation as a share of GDP has been declining in many countries over the past two decades as capital has displaced labor. However, from a horizontal comparison, the proportion of labor compensation in China is not low. Taking the data of some countries from 2010 to 2019 as an example, China’s labor compensation accounts for 57% of GDP. Although this value is lower than that of Britain, the United States, France and Germany, it is higher than other countries. Among the three major East Asian economies of China, Japan, South Korea and the BRICS countries, China has the highest proportion of labor compensation. Therefore, the proportion of labor remuneration is not the reason why residents “have no money”, and this cannot explain the problem of the low consumption rate of residents. For example, Brazil’s labor compensation ratio is slightly lower than China’s, and Mexico’s labor compensation ratio is as low as 37%, but the proportion of residents’ consumption in GDP in both countries is as high as 64%.
Directly related to the first type of income distribution is the second type of income distribution, that is, the problem of income distribution among people. As a result of labor being exploited by capital, within the resident sector, a small number of rich people occupy most of the income and wealth and a majority of poor people suffer from hunger and cold. The rich, even if they are extravagant and dissipated, cannot consume the wealth they possess; the poor, no matter how high their propensity to consume, have no money to consume. Therefore, under the condition that everyone has a certain consumption propensity, the widening income distribution gap between people will inevitably lead to the decline of the overall consumption ability. However, this view is also debatable.
The Gini coefficient reflects the distribution relationship between people. The higher the coefficient, the more unequal the income distribution. Comparing the Gini coefficients of some countries, China ranks fifth among the 15 countries. This shows that China does have room for improvement in terms of income distribution in this sense. However, whether it is a country with a lower Gini coefficient than China, such as the United Kingdom, India, Japan, etc., or the United States, Mexico, Brazil and South Africa with a higher Gini coefficient than China, the household consumption rate is much higher than China’s level. Moreover, we have seen earlier that the United States, which has a higher Gini coefficient than China, has a higher proportion of residents’ income than China. Therefore, the income distribution gap between people can neither explain the low proportion of residents’ income, nor has anything to do with the level of residents’ consumption rate.
List of Gini coefficients of some countries in the world in 2018 (network pictures)
The third income distribution problem is the distribution of national income among the three major departments of residents, enterprises, and government. The result of this distribution is clear at a glance: the lower proportion of residents’ income must be due to the higher proportion of income from other sectors. Comparing the national income distribution structures of China and the United States from 2012 to 2020, China’s government and corporate sectors accounted for 20% and 19% of income, while the U.S. government and corporate sectors accounted for 9% and 16% of income, respectively .
Therefore, the fundamental reason why Chinese residents “have no money” is that in the sectoral distribution of national income, the government sector occupies an excessively high proportion of income.
3. Two ways to increase the proportion of residents’ income in national income
So, how to increase the proportion of residents’ income in national income? The answer to the question can be found by further observing the income structure of Chinese and American residents. Statistics on residents’ income in China and the United States are different, but they can generally be attributed to three items:
Disposable income of residents = labor remuneration + property income + current transfer
Among them, labor remuneration is mainly salary income. In China, this item also includes added value similar to salary income (which can be understood as the operating income of small and micro enterprises and self-employed individuals); property income includes interest, bonuses, rent, etc., property income Income and labor remuneration constitute the income of primary distribution; the current transfer is the income that the government gives to residents through redistribution, which is equal to the net amount of social welfare subsidies that residents receive from the government, after deducting the paid income tax and social security contributions .
Comparing the three items of income of Chinese and American residents, the property income of Chinese residents only accounts for just over 4%, and current transfer income is almost negligible. On the contrary, in the income of American residents, property income accounts for 22%, and current transfers also reach 9%. Therefore, the two ways to increase the proportion of residents’ income in national income are to increase residents’ property income and current transfer income—both of which are related to the high proportion of government sector income.
To increase the property income of residents, the first thing is to allow the residents to own property. If you don’t own property, how can you get property income? As a factor of production that joins the production function and promotes economic growth, capital is the ultimate source of property income in the entire economy. Therefore, the ownership of capital determines the property income of residents. According to the statistics of the International Monetary Fund, after the reform and opening up in 1978, private capital in China’s capital ownership structure increased significantly, but until 2019, private capital accounted for only 64%, and state-owned capital (that is, capital owned by the general government) accounted for The ratio is as high as 36%. In contrast, private capital accounted for 83% of the capital ownership structure in the United States in 2019.
In the case of certain assets, the second method to increase property income is to improve the property structure of residents. Observing the property structure of Chinese and American residents, we can find the second crux of the low property income of Chinese residents, that is, the proportion of real assets is too high, and the proportion of deposit assets in financial assets is too high, both of which are low-yield assets. On the contrary, U.S. residents have a high proportion of financial assets, among which equity assets and assets held by institutional investors (pension funds, mutual funds, life insurance, etc.) account for a high proportion. Calculated, among the financial assets of the U.S. resident sector, more than 50% of equity assets are held directly and indirectly through institutional investors-this is another reason for the higher income of residents.
In addition to property income, the more direct and urgent way to increase the proportion of residents’ income in national income is to increase residents’ current transfer income. One of the functions of finance is redistribution, that is, using collected tax and non-tax revenues to resupply vulnerable groups in the household sector. However, observing the sectoral distribution of current transfers in China, the current transfer income received by the government sector has been much higher than that of the residential sector throughout the year. In 2018 and 2019, the current transfer income of the resident sector was even negative. In 2020, when the new crown epidemic broke out, although the government’s current transfer income has declined, it is still as high as 3.8 trillion yuan, and the residents’ current transfer income has increased, but it is only a mere 200 billion yuan.
This scene is in stark contrast to the United States during the COVID-19 pandemic: in the two years of 2020 and 2021, the U.S. government’s fiscal expenditures have increased by a total of 16 trillion U.S. dollars compared with before the epidemic. 11 trillion US dollars, accounting for 69% of all new fiscal expenditures. Therefore, after the epidemic was sealed off, American residents dared to consume, were willing to consume, and were able to consume because they were “rich”. Of course, huge fiscal welfare expenditures have also resulted in high CPI—but compared with shrinking consumption and economic downturn, this price is worth it.
With regard to the problems existing in China’s finance, previous studies have pointed out that in the initial distribution link, the finance accounted for a relatively large proportion of income through higher macro-tax burdens, and in the redistribution link, part of the income was transferred to other countries through current transfers. Own. Therefore, the alienation of fiscal functions is the fundamental crux of the low proportion of Chinese residents’ income in national income. This shows that the current financial system has reached the point where fundamental adjustments and reforms are needed. There are three problems in China’s fiscal system: the “food finance” that focuses on supporting people, the “investment finance” that intervenes too much in economic affairs, and the “hole finance” that accumulates debts rapidly.
In short, the proportion of Chinese residents’ income is too low, and even the consumption rate of residents is too low, because of the institutional constraints of fiscal and financial aspects. After three years of the epidemic, with the improvement of employment and the recovery of consumption scenes, residents’ consumption will of course be restored to a certain extent, but we should not expect too much of it. In the absence of eradication of systemic defects, household consumption has not been and will not become the main driving force for the economy.
Editor in charge: Yu Zhen
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