Economics: Can China pivot to consumption?

Consumption accounts for a small share of Chinese GDP

Household consumption is likely to be China’s main growth driver this year, and recent plans call for a shift toward consumption over the longer run. Consumption accounts for a small share of GDP mostly because household savings rates are unusually high. 

Tax reform could shift the growth model toward consumption

China’s wage share of GDP is comparable to other countries, but the government does little to flatten the distribution of income. A less regressive tax regime could accelerate the shift toward consumption that has so far been gradual and driven by demographics.

Current plans to boost consumption are fundamentally unserious 

Consumption is central to the government’s plan to boost domestic demand. But the policies it has proposed will likely have little impact on household saving behaviour. Without fiscal reform, consumption is unlikely to become a long-term growth driver.