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| The myth of the suppressed Chinese consumer |
In reality, the country has the fastest household spending growth rate of the 21st century
Ruchir Sharma
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Ruchir Sharma
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The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’
The great half-truth about China is that its economy consumes too little and invests too much. Over-investment is a real problem, but underconsumption is not. So the mounting calls on the country to “rebalance” by encouraging more consumer spending are misguided. In the standard telling, China set out to become a manufacturing power in the 1980s and has since suppressed spending by consumers, so it could pour their savings into building ports and factories. But the suppressed consumer is a myth.
So far this century, in real terms, private consumer spending in China has grown more than 8 per cent a year, faster than in any other economy — by far. Over the past few years, consumer spending growth has slowed in most countries, due to ageing populations and falling real incomes, and it has fallen in China as well to 5 per cent a year. But that is still higher than in any other major economy except Turkey, where consumption was boosted by a credit boom and refugee inflows.
The myth rests in good part on the consumption share of China’s GDP, which is just 40 per cent — well below the global norm. But the reason for this anomaly is not that consumption has grown slowly, it is that the other big component of GDP, investment — in infrastructure, real estate, export industries — has grown even faster, averaging 10 per cent a year in this century.
That pace, too, is the fastest for any major economy by a significant margin. Corrected for this long-term pattern of over-investment, the consumption share of China’s GDP would be around 55 per cent, closer to normal.
Consumer spending has also grown much faster in China than in established and newer Asian manufacturing powers, from Japan and South Korea to Indonesia and Malaysia. And when the original miracle economies were reaching the level of development in China today, they too saw sharp slowdowns in consumer spending growth.
Yet, somehow, calls to free the Chinese consumer persist alongside mounting evidence of the steady growth in their spending. It’s difficult to spot symptoms of repression among the Chinese shoppers in luxury stores from Shanghai to Paris. Drill down into consumer spending, and growth looks to be weakening mainly for services, not goods. But this, too, is partly illusory. If one factors in services provided by China’s government at little or no charge, including healthcare and education, consumption rises significantly as a share of GDP.
Investment, on the other hand, is clearly excessive at 40 per cent of GDP and roughly equal to consumption. In a typical economy, investment is lower than consumption as a share of GDP but more important to the economic cycle. Consumers can’t stop spending on necessities in a downturn but businesses can stop investing, at least for a while.
This binge has been extreme. Only 10 countries have ever seen investment peak above 40 per cent of GDP, briefly. At that level, so much capital flows to unnecessary projects that the binge tends to reverse quickly, slowing growth. China, uniquely, has managed by debt engineering to keep investment above that for two decades now.
Relentless over-investment is fuelling tension with trading partners, since China ends up exporting a lot of its excess production, and breeding dysfunction at home. Over time, such binges tend to divert capital into less productive targets such as real estate — which helps explain China’s debt-soaked property market today.
The outsiders urging China to focus instead on the consumer can cite genuine “structural” obstacles to their spending. Internal migration controls block many rural Chinese from moving to higher paying urban jobs. Meager pensions compel many workers to save for retirement rather than spend. The weakening real estate market and other negative “wealth effects” further discourage spending.
China’s leaders seem to be heeding some of this advice. An “action plan” announced in March promised to “vigorously boost consumption”, but so far the action has been light on structural reform and heavy on subsidies for purchases of goods such as home appliances — which have only a passing effect. Consumers rushing to buy rice cookers now won’t be buying them in coming years.
China’s consumer spending has been growing at a world-beating pace and doesn’t have much room to accelerate, particularly not when many households are deep in debt. That debt has tripled in the past 15 years to over 60 per cent of GDP, among the highest in emerging markets and close to that in the heavily consumer-driven US economy.
The country can’t solve the real problems caused by over-investment — from geopolitical tensions to dysfunction at home — by attacking the phantom problem of underconsumption. The crux of the imbalance is that the state has been pushing too much investment for too long in the name of hitting its inflated growth target, now set at 5 per cent.
The answer is not to shift the focus of state meddling to boosting consumption. It is to accept that China is weighed down by a shrinking population, declining productivity and a huge debt load. It has a real potential growth rate closer to 2.5 per cent than 5 per cent. And as growth slows to a more realistic pace, consumption will naturally expand as a share of the economy.
Copyright The Financial Times Limited 2025. All rights reserved.
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McLovinMaJob
24 minutes ago
It’s difficult to spot symptoms of repression among the Chinese shoppers in luxury stores from Shanghai to Paris.
Correct me if I'm wrong, Chinese consumer buying Hermes or Goyard in Tokyo or Paris will not show up as consumption in China.
It will show up as either credit card spending, or more likely, net cash withdrawal!
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agar jones
25 minutes ago
I think FT's Free Lunch column did a deeper analysis of this a few weeks back:
Don't underestimate the chinese consumer
archive.ph
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wrongun
1 hour ago
except Turkey, where consumption was boosted by a credit boom and refugee inflows.
I've long suspected that European governments are refusing to do anything about illegal immigration for this reason - because they flatter the economic statistics.
Good piece though.
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ChangShou in Spain
34 minutes ago
In reply to wrongun
This is explicit policy in Spain
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Helvetico
14 minutes ago
In reply to wrongun
Amazing. All they see are macro numbers, not the social and economic costs of refugees on schools, hospitals, the criminal justice system and local culture.
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sven.
1 hour ago
Given crumbling infrastructure and a failure to address the challenge of energy production across the West is it accurate to say that China over-invests ?
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ChangShou in Spain
31 minutes ago
In reply to sven.
Much of the infrastructure is great and useful, but if you’ve seen the mile after mile of unoccupied and often unfinished apartment blocks around most Chinese cities then it’s not controversial to say there has been over investment.
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Heyho13
13 minutes ago
In reply to ChangShou in Spain
“Most Chinese Cities” - I think that’s a sweeping and inaccurate statement as most Chinese cities are heavily populated.
Over investment and abandoned projects are often new cities which never took off as it just wasn’t an attractive place for people to move to (no jobs). And this is a small % of the number of cities and towns that China has.
If you look to Dubai, Malaysia, Thailand, etc.. economies which has had major booms - they all had half done infrastructure examples.
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ABruckner
2 hours ago
As usual with this pundit, there is a mix of fact and error. I was in Beijing at a large dinner last year, and the admittedly middle class guests said: “just what am I to spend my money on? I have a car, a home, a modern, fully equipped household and my kids have piano lessons — and I took an international trip last year (2004).
My health care and higher education are subsidized by the government, as is public transportation, and food costs are stable [and I add, shockingly low].
Sharma is highly manipulative by claiming the Chinese consumer is in debt. This debt is to whom? Credit card companies? Student loan agencies? Personal bank loans? Finance companies? Paycheck companies?
The fact is that Chinese are enormous savers and they put their savings into banks who are the lenders to the central government. Very similar to Japan, which is also misidentified as a highly indebted nation.
No one in the west talks about Asian “debt” to external or third parties, because that is a very small proportion of household liabilities.
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Charles Levett-Scrivener
35 minutes ago
In reply to ABruckner
nowhere did he claim that consumers were in debt.
The property debt is mainly at the level of the property development companies and local government and their linked financial institutions.
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Helvetico
12 minutes ago
In reply to Charles Levett-Scrivener
China’s consumer spending has been growing at a world-beating pace and doesn’t have much room to accelerate, particularly not when many households are deep in debt.
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ChangShou in Spain
30 minutes ago
In reply to ABruckner
It’s a large and diverse country to say the least - many are up to their eyes in mortgage debt sometimes for uncompleted projects.
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ChangShou in Spain
29 minutes ago
In reply to ChangShou in Spain
Very many young people are unemployed
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The Simplifier
3 minutes ago
In reply to ChangShou in Spain
Bro you've probably lived in Spain for too long and think young Chinese are brainless on taking debt they can't handle
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Paul A. Myers
2 hours ago
... private consumer spending in China has grown more than 8 per cent a year, faster than in any other economy — by far.
This is a powerful motor to the overall larger and geopolitically potent Far East regional economy, which is increasingly the central regional economy of the world.
Another much needed addition to the Chinese economy would be a good reliable safe saving asset paying a real rate of return--possibly by the financing of foreign investment abroad that would create demand for Chinese goods and services.
With the US administration of President Trump engaged in across-the-board policy dysfunction, China should move to build a more balanced international economy in the new global economy that is emerging.
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Ai Hong
2 hours ago
(Edited)
Western economists often overlook the $3.6 trillion shadow economy in China, That’s the equivalent of the entire UK economy operating off the books. Ignoring it distorts analyses of Chinese consumption, resilience, and debt capacity. It’s like trying to judge an iceberg by what floats above the waterline.
archive.ph
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Orcadian1
2 hours ago
(Edited)
But surely China is preparing for the declining population and workforce by increased investment in robotics? This is a far more effective strategy than investment in real estate and opens the door to Chinese robotics exports to western countries like UK that also have a demographic imbalance between working age and retired labour force, and a low birth rate. For sure, UK will be one of the biggest customers. This is the answer to a shrinking population and declining productivity. Consumption of Chinese products will continue rising and not only in China.
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Director of Communications
2 hours ago
Interesting article. But rather than dispensing advice to China—U.S. economists ought to be seeking it.
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ChangShou in Spain
22 minutes ago
In reply to Director of Communications
Here’s the advice you should follow to achieve 10%+ growth year after year: start with an entirely unmechanised rural economy accounting for 80-99% of the population. Destroy it by causing all the tools to be melted down. Close down all education except for a few elite schools for 10 years. Now take the brakes off but only slowly and progressively. It’s true that China’s technocrats are quite impressive since 2000, but what has happened has been the same process of urbanisation and industrialisation seen elsewhere, carried out after artificial retardation and in an age of great wealth in other nations, and when international political and trade organisations and technological developments have been conducive to trade.
China is impressive no doubt, but it’s not a lesson for anywhere else except perhaps Vietnam and N Korea.
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cubana
2 hours ago
great article!
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BotanyWhig
3 hours ago
Interesting analysis. Essentially, it is not that consumption is low, as such, but that state-backed investment has been too high. The problem, of course, is without that investment, the CCP could not meet its growth targets.
One issue:
Meager pensions compel many workers to save for retirement rather than spend.
Wouldn’t enhanced pensions require even more saving in the here and now, though? Unless they are funded by today’s workers, which would raise taxes and probably not be sustainable.
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TRC
3 hours ago
This article is cherry picking data. The main growth/spender demographic - both in present and future terms - is not spending rather, it thinks ultra-frugality is chic. Social media and travel habits of this vital demographic support this fact as does the masses of the unemployed whom also belong to this demographic. This is an odd counterfactual piece which rightfully belongs in the Opinion section rather than news section, the latter which is based on fact.
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Aenus
3 hours ago
First, please let's not confuse household consumption with aggregate consumption. Government consumption plays a role too.
The IMF points the finger mainly at the weak social safety net for rural workers, which 1) keeps government consumption down, and 2) indices excess savings among those poorer households in order to insure against shocks.
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chen
3 hours ago
Not sure I understand the authors point. Why point to rapid consumption growth versus other countries when everyone knows that this is supported by artificially rising GDP due to profligate spending in infrastructure by the government? If the CCP stops their irresponsible fiscal deficit both consumption growth and investment growth will rapidly fall ultimately leaving an unbalanced economy with poor consumption. The fact that consumption is a shrinking share of GDP proves this fact after all.
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Argus
3 hours ago
(Edited)
Chinese households save far more than others: the household savings rate in China has hovered around 34%, compared to just 4–5% in the United States, below 5% in the United Kingdom, and under 4% in Japan. Since savings is the reciprocal of consumption, Chinese consume much less.
Deep-rooted Confucian values and a long history of economic instability have fostered a culture of frugality. Uncertainty aversion—shaped by memories of economic reforms and mass layoffs in the 1990s—has left many Chinese with a “better safe than sorry” approach.
Demographics are also crucial. As someone who grew up in a family of five children and is now the father of three, I know firsthand how consumption goes on steroids when you have kids—think of the familiar scene: “Daddy, can I get the same shoes as my friend Sally?” as your child tugs your arm while passing a store window. Chinas one-child policy was like slamming on the brakes.
Yes, consumption as a quotient theoretically expands as Chinese population gropes towards extinction, to the extent this is meaningful.
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Bolognese_Bucket
3 hours ago
In reply to Argus
What you're pointing out isn't unique to China but a fact of life in developing economies (especially ones with large populations). You'll see high savings rates in India, Indonesia, Vietnam etc
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Argus
3 hours ago
In reply to Bolognese_Bucket
Chinese are more cautious savers, yes; demographic aspect common but China (and Japan) interesting as leading indicator
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Garden of bang bang
2 hours ago
In reply to Argus
China’s household savings should be seen on a sectoral balances level and not as a percentage of wages. China has a large current account surplus and governments at all levels run substantial deficits. The corresponding surpluses must then necessarily end up in the private sector and more specifically in the household sector. The point now is that in China wages as a percentage of GDP is still a rather low 40% as opposed to close to 60% in most western economies. This then artificially inflates the savings rate. E.g. if wages were 60% of GDP you’d divide by a 50% larger denominator, bringing the savings rate closer to German levels.
E.g. in Germany wages make up 60% of GDP whereas the savings rate is 20% according to Eurostat. Just like China, Germany has a large external surplus, which then mostly accrues to the household sector.
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Jaws
57 minutes ago
In reply to Argus
"Uncertainty aversion"
Given a massive boost by Covid, when the government provided zero financial help to the public and the realisation that the CCP does not care one iota about the public.
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CSbob
29 minutes ago
In reply to Argus
Consumptions are also cheaper in China. Electricity for 3 ppl family is less than £20 a month, water bill less than £60 a year, tube fare about 50p one way, no council tax, BMW 320i cost £25k. A £2000 monthly average spending in London would cost less than £800 in China
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Jerome a Paris
4 hours ago
That's a weird argument. The growth of consumption does not matter, it's the fact that China has surplus savings and needs to export more than it imports. What exactly causes that imbalance is relevant only to the extent that you say "let's reduce investment (which will reduce growth) to increase consumption's share of a smaller GDP" or "lets consume even more"
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Bolognese_Bucket
3 hours ago
In reply to Jerome a Paris
Consumer spending growth doesn't matter when discussing how a nation's policy is affecting the consumer's ability to spend?
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Garden of bang bang
2 hours ago
In reply to Jerome a Paris
You’re mixing up cause and effect. China exports more than it imports because its manufacturing sector is more competitive than that of most (in fact all) of its trading partners. The result is excess savings at home. The question then is: where do these excess savings end up? In China these flow mostly to the household sector. Japan similarly has a current account surplus for mostly the same reason and here surplus savings mostly accumulate to corporate balance sheets (which in my opinion is poor management as the role of a corporation is not to hoard cash but to produce dividends). Germany is in exactly the same situation as China: external surplus accruing mostly to the household sector.
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Jerome a Paris
2 hours ago
In reply to Garden of bang bang
You've got it exactly wrong.. the surplus from exports are claims on foreigners, which appear as increased ownership of Treasuries or other foreign assets - but not as consumption.
In an unmanipulated system, this would lead to currency appreciation (as it did for many years for Germany, before the effect was somewhat diluted with the euro, which is influenced by more than just the German international balances) unless such currency's exchange rate is "guided" for mercantilist purposes.
Read Ricardo - there will be competitive trade *even if* one country is more competitive in all sectors - what matters is the relative competitive advantage - again unless something is manipulated .
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A thought...
2 hours ago
In reply to Jerome a Paris
Indeed. Michael Pettis has explained this very well.
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Garden of bang bang
4 minutes ago
In reply to Jerome a Paris
You're mixing up savings with investments. Savings is the difference between what flows in and what flows out. Investment is what is done with these savings. What is being done with these savings (whether buying treasuries, gold, overseas property,...) is not relevant to the discussion here. The point is that the country as a whole has a positive savings rate.
As to China manipulating its competitive position by keeping its currency down (i.e. pegged to the dollar), that's a fair point. However, I believe that's a deeply misguided policy which is in fact eroding China's competitive position, or at least stunting it. See comment in the link below on that on Switzerland in this context: Switzerland is benefitting from its strong currency as a strong currency disciplines industry into innovating and staying ahead while forcing uncompetitive/low value added industry out of the country:
archive.ph
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Stefan Zweig
37 minutes ago
In reply to Jerome a Paris
Agreed. Putting up a straw man by looking at growth rather than levels. Whatever….
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CSbob
21 minutes ago
In reply to Jerome a Paris
Trade imbalance is not a problem its a blessing to the world. Imagine iPhone costs £3000 that's if China is not producing to extend that to every industry and that's a real problem
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Plingster
3 minutes ago
In reply to Jerome a Paris
Agreed - a very strange argument. Suppose consumption was 10% of GDP but growing at 100% per year. I think this author would then say "It's okay! Consumption isn't too low! Look how fast it's growing?" It's the level, not the first derivative, that matters in understanding the imbalances in the Chinese economy (or any other).
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Old Cat Lady
4 hours ago
Fair enough. But it seems to me like this is semantics mostly. The imbalance exists but, the author argues, it is because there has been way too much investment. Not too little consumption.
In the end, does it matter? The Chinese government will not stop pushing too much investment down the throat of the country to hit inflated GDP targets. The imbalance will not be solved, it will explode (again) in some ugly way in the future.
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Global village
2 hours ago
In reply to Old Cat Lady
This the crux of matter. As a declining population and workforce really starts to kick in, consumption growth will go down and investment growth must go down as well unless China indefinitely expands its global market share of production and exports, which is what the whole rest of the world fears. Interestingly, at its peak, the US accounted for over 45% of world manufacturing output and 25% of merchandise exports. China is not yet at US peak levels. As the workforce declines, wages will grow faster helping to prop up consumption levels but also, eroding China’s cost advantage vs US, Europe and East Asia for high tech manufacturing. So we may naturally see China reach peak share of global industrial output and exports in a few years time followed by a decline.
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Magic Nun
1 hour ago
In reply to Global village
2024 Manufactured Goods Exported:
USA : $2 Trillion
China : $3.5 Trillion
EU : $6.9 Trillion
Europe remains the manufacturing powerhouse.
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Jerome a Paris
32 minutes ago
In reply to Magic Nun
That probably includes intra-EU trade, which artificially inflates this particular number, no?
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