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Explaining China's Low Consumption: The Neglected Role of Household Income

  • Jahangir Aziz
  • Li Cui
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    The Chinese government has recently focused on the need to increase consumption to rebalance the economy. A widely held view is that despite China''s remarkably high growth, the share of consumption in total expenditure has been low and declining due to high and rising saving rate of Chinese households as uncertainty over provision of pensions, and healthcare and education costs have increased since the mid-1990s. This paper finds that the rise in saving rate has been a minor factor. Much larger has been the role of the declining share of household income in national income, which has occurred across-the-board in wages, investment income, and government transfers. The paper finds that financial sector weaknesses, by restricting firms'' access to bank financing for working capital, have played quantitatively a major role in keeping wage and investment income shares low and on a declining trend.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/181.

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    Length: 36
    Date of creation: 01 Jul 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/181
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    1. Franco Modigliani & Shi Larry Cao, 2004. "The Chinese Saving Puzzle and the Life-Cycle Hypothesis," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 145-170, March.
    2. Eswar Prasad & Raghuram Rajan, 2006. "Modernizing China's Growth Paradigm," IMF Policy Discussion Papers 06/03, International Monetary Fund.
    3. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    4. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
    5. Brown, J David & Earle, John S & Lup, Dana, 2005. "What Makes Small Firms Grow? Finance, Human Capital, Technical Assistance, and the Business Environment in Romania," Economic Development and Cultural Change, University of Chicago Press, vol. 54(1), pages 33-70, October.
    6. Keiichiro Kobayashi & Masaru Inaba, 2006. "Borrowing constraints and protracted recessions," Discussion papers 06011, Research Institute of Economy, Trade and Industry (RIETI).
    7. Blanchard, Olivier J & Giavazzi, Francesco, 2006. "Rebalancing Growth in China: A Three-Handed Approach," CEPR Discussion Papers 5403, C.E.P.R. Discussion Papers.
    8. Kuijs, Louis, 2005. "Investment and saving in China," Policy Research Working Paper Series 3633, The World Bank.
    9. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
    10. Aart Kraay, 2000. "Household Saving in China," World Bank Economic Review, World Bank Group, vol. 14(3), pages 545-570, September.
    11. Einarsson, Tor & Marquis, Milton H, 2001. "Bank Intermediation over the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 876-99, November.
    12. Steven M. Fazzari & Bruce C. Petersen, 1993. "Working Capital and Fixed Investment: New Evidence on Financing Constraints," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 328-342, Autumn.
    13. Simon Johnson & John McMillan & Christopher Woodruff, 2000. "Entrepreneurs and the Ordering of Institutional Reform: Poland, Slovakia, Romania, Russia and Ukraine Compared," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(1), pages 1-36, March.
    14. Jahangir Aziz, 2006. "Rebalancing China's Economy: What Does Growth Theory Tell Us?," IMF Working Papers 06/291, International Monetary Fund.
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