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Market reforms and consumption puzzles in China

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  • Qi, Li
  • Prime, Penelope B.
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Abstract

China exhibits above average savings and below average consumption as shares of total economic activity when compared with other countries. At the same time, to create more balanced growth at home and rebalance key bilateral trade and capital flow relationships, China's leadership is trying to increase domestic demand. To complement studies that investigate the high rate of savings in China, this study focuses on the variation in consumption as a share of GDP across provinces between 1979 and 2004. Drawing on well-established consumption theories and work done on savings behavior in China, this paper develops an empirical investigation of the variables hypothesized to influence the pattern of consumption across regions. We find that the normal, economic variables have a small explanatory power if significant at all, while the key variables influencing the macro consumption share are structural, and mostly related to government behavior. For example, local government expenditure on health and education is significant and has a relatively large effect on consumption. Consistent with this we also find a positive relationship between consumption shares and the size of the state sector and the share of tax revenue in GDP. We also find some evidence that financial development has a positive effect on consumption shares. Our results suggest that in order for domestic consumption to be increased in the future, new public and private options to replace the declining security and responsibility of the prior state-dominated system will be needed.

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Bibliographic Info

Article provided by Elsevier in its journal China Economic Review.

Volume (Year): 20 (2009)
Issue (Month): 3 (September)
Pages: 388-401

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Handle: RePEc:eee:chieco:v:20:y:2009:i:3:p:388-401

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Web page: http://www.elsevier.com/locate/chieco

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Keywords: Transition Consumption Saving Domestic demand National markets;

References

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Cited by:
  1. Manoel Bittencourt & Chance Mwabutwa & Nicola Viegi, 2012. "Financial Reforms and Consumption Behaviour in Malawi," Working Papers 201210, University of Pretoria, Department of Economics.
  2. Bonatti, Luigi & Fracasso, Andrea, 2013. "Regime switches in the Sino-American co-dependency: Growth and structural change in China," Structural Change and Economic Dynamics, Elsevier, vol. 25(C), pages 1-32.
  3. Fernando Alexandre & Carmen Mendes, 2011. "Growth, Competition and Political Stability in China," NIPE Working Papers 28/2011, NIPE - Universidade do Minho.

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