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Market reforms and consumption puzzles in China

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Author Info

  • 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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  1. Charles Yuji Horioka & Junmin Wan, 2006. "The Determinants of Household Saving in China: A Dynamic Panel Analysis of Provincial Data," NBER Working Papers 12723, National Bureau of Economic Research, Inc.
  2. Lewis, William W., 2004. "The Power of Productivity," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226476766, September.
  3. Song, Haiyan & Liu, Xiaming & Romilly, Peter, 1996. " A Time Varying Parameter Approach to the Chinese Aggregate Consumption Function," Economic Change and Restructuring, Springer, vol. 29(3), pages 185-203.
  4. Bai, Chong-En & Du, Yingjuan & Tao, Zhigang & Tong, Sarah Y., 2004. "Local protectionism and regional specialization: evidence from China's industries," Journal of International Economics, Elsevier, vol. 63(2), pages 397-417, July.
  5. Alwyn Young, 2000. "The Razor'S Edge: Distortions And Incremental Reform In The People'S Republic Of China," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1091-1135, November.
  6. Blanchard, Olivier J & Giavazzi, Francesco, 2006. "Rebalancing Growth in China: A Three-Handed Approach," CEPR Discussion Papers 5403, C.E.P.R. Discussion Papers.
  7. Sandra PONCET, 2002. "A Fragmented China. Measure and Determinants of Chinese Domestic Market Disintegration," Working Papers 200221, CERDI.
  8. Kenneth W. Clements & Ye Qiang, 2001. "The Economics of Global Consumption Patterns," Economics Discussion / Working Papers 01-18, The University of Western Australia, Department of Economics.
  9. Christopher F Baum, 2006. "An Introduction to Modern Econometrics using Stata," Stata Press books, StataCorp LP, number imeus, April.
  10. Yin Zhang & Guang Hua Wan, 2004. "Liquidity constraint, uncertainty and household consumption in China," Applied Economics, Taylor & Francis Journals, vol. 36(19), pages 2221-2229.
  11. Barry Naughton, 2007. "The Chinese Economy: Transitions and Growth," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640643.
  12. James L. Seale & Anita Regmi, 2006. "Modeling International Consumption Patterns," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 52(4), pages 603-624, December.
  13. Alwyn Young, 2000. "The Razor's Edge: Distortions and Incremental Reform in the People's Republic of China," NBER Working Papers 7828, National Bureau of Economic Research, Inc.
  14. Poncet, Sandra, 2003. "Measuring Chinese domestic and international integration," China Economic Review, Elsevier, vol. 14(1), pages 1-21.
  15. Kuijs, Louis, 2005. "Investment and saving in China," Policy Research Working Paper Series 3633, The World Bank.
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Cited by:
  1. 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.
  2. Fernando Alexandre & Carmen Mendes, 2011. "Growth, Competition and Political Stability in China," NIPE Working Papers 28/2011, NIPE - Universidade do Minho.
  3. Chance Mwabutwa & Manoel Bittencourt & Nicola Viegi, 2012. "Financial Reforms and Consumption Behaviour in Malawi," Working Papers 306, Economic Research Southern Africa.

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