By Zhang Jun and Zhu Tian Source:Global Times Published: 2013-1-24 22:48:01
It is now considered conventional wisdom that the Chinese consume too little and save too much, and China's reluctant consumers have contributed to the global economic imbalance. But the truth is that China's consumption is grossly underestimated. China's true rate of consumption can be 10 to 15 percentage points higher than official figures, reaching 60 to 65 percent of GDP, a desirable rate for a fast-growing developing economy. Rich countries mired in their own economic quagmires need to find domestic solutions instead of blaming China for consuming too little.
There are several sources of underestimation of consumption in China's official data. Firstly, Chinese statistics have significantly underestimated housing consumption including rentals, utility and decoration expenditures. Rentals include actual rents paid by tenants and more importantly, imputed rents for owner-occupied homes. In practice, calculating imputed rent is not an easy task. China's statistics bureau uses construction costs multiplied by a fixed depreciation rate for a rough estimate. While this method is easy to employ, it greatly underestimates actual housing consumption. For starters, construction costs, which do not even include land costs, greatly underestimate the market value of housing, and the 2 percent depreciation rate applied for urban housing also underestimates the rental rate of return. Using this method, China's housing consumption accounted for only 6 percent of GDP in 2009. In contrast, housing consumption in high-income countries such as the US, Japan, UK, Germany, France and Canada took up around 14 percent of GDP in the same year; while in Mexico and Turkey, it accounted for 11 percent and 16.5 percent of GDP respectively.
The second source of consumption underestimation comes from the fact that official statistics cannot account for private consumption that is paid for by company accounts and thus treated as either business costs or, in the case of durable goods, as investment expenditures. Such consumption is commonplace in China. For example, many business owners and executives purchase private cars on company accounts. Instead of being counted as private consumption, the costs of these cars are counted as investment expenditures. Actually, we suspect that most imported luxury cars in China are purchased this way. This practice also extends to vacations, dining, mobile phone bills, gasoline purchases and many kinds of household good sales. It saves significantly on corporate as well as personal income taxes. It is also a benefit or in-kind consumption for executives at State-owned firms. Of course it's impossible to know exactly how much of such consumption is unaccounted for. If it makes up, say, 10 percent of total household consumption, then China's rate of consumption would increase by 3.5 percent.
The third source of underestimation has to do with household survey methods which rely on randomly sampled households to record monthly incomes and expenditures. These households are paid only a small nominal compensation for participating. Aggregate household consumption expenditures are calculated by multiplying the average consumption expenditure per capita across the entire population. Several problems arise when doing this though. For one thing, high income households are known to be under-represented because they have no incentives to report their incomes or bother with keeping expenditure records. This would underestimate average consumption per person. Moreover, households may easily miss recording some expenditures, especially small ones, as there are no explicit incentives for them to keep an accurate record. Also, in-kind consumption may be underestimated either because people fail to record it or assign it a low value.
Lastly,?local currency-based national account statistics are not ideal for cross-country comparisons. Academics often use what is called the Penn World Table (or Summers-Heston Dataset) instead. The Penn World Table (PWT) was developed by the International Comparison of Prices Program at the University of Pennsylvania. It differs from the official national account statistics in that it makes purchasing power parity adjustments to consumption and investment price levels as well as official (or market) exchange rates. According to the just-released version of the PWT, and without including the missing consumption expenditures we just mentioned above, China's consumption ratio stood at 60.9 percent of GDP in 2010, the latest year the table covers, not the official figure of 47.4 percent.
China's consumption rate is generally comparable to levels of consumption in the East Asian tiger economies based on figures from the PWT. For example, South Korea's consumption has been around 60 percent of GDP since the mid-1980s and Singapore's consumption has hovered at an average of 45 percent over the past 20 years. All of the tigers have gone on to become high-income developed economies. China seems firmly on its way to eventually joining the club.?
The authors are Zhang Jun, director of China Center for Economic Studies at Fudan University, and Zhu Tian, professor of Economics from China Europe International Business School. bizopinion@globaltimes.com.cn