Thread by @michaelxpettis

1/15
Very interesting Economist piece on Chinese consumption, if a little one-sided. The article argues that the way the data are presented in China systematically underestimates consumption.

economist.com/finance-and-ec…

2/15
It would have been much more accurate to say that Chinese data are very complex and underestimate some forms of consumption while overestimating others. For example among the fastest-growing "consumption " components in the past decade have been gold/jewelry, or while...

3/15
goods, but there is good reason to believe that much of this represented investment more than consumption. In fact more generally in an economy with restricted capital accounts and a highly managed financial system, there are always questions about classification.

4/15
That's why what really matters is how consumption impacts the economy, and there should be little doubt that Chinese consumption, as most Chinese economists now recognize, is extraordinarily low. We can see this just by looking at the balance of payments.

5/15
Chinese investment, at 42-44% of GDP, is one-third higher than that of even the highest-investing economies of the world, who rarely invest above 30-34% of their GDPs. This is extraordinarily high – only China itself, 5-10 years ago, has exceeded this level.

6/15
Because a country's current account balance is the gap between domestic savings and investment, this should imply that China runs a large deficit. And yet China runs a large surplus, which is another way of saying that as extraordinarily high as its investment share, its...

7/15
savings share is even higher. And because savings is simply the obverse of consumption, this just means that its consumption share of GDP is extraordinarily low. If we want to understand the weaknesses in the Chinese economy, this is what we need to focus on.

8/15
The Economist also argues while household income in China is relatively low, it is in line with that of other low income countries. There are a lot of problems with this argument, as this thread by Adam Wolfe suggests.

https://twitter.com/adamkwolfe/status/1674084721817444353

9/15
Wolfe argues that "the biggest factor behind China’s low consumption rate is its tax policy and its under-developed safety net," but of course the social safety net is just one of the ways in which households receive income.

10/15
That's why I prefer to look at "revealed" behavior. If Chinese households consume a very low share of what they produce, it must either be because Chinese households aren't interested in raising their living standards or because ordinary households...

11/15
are not receiving, either directly or through their evaluation of expected social safety benefits, enough income to justify higher consumption. If the former, they should stop working. If the latter, they should receive a higher share of what they produce.

12/15
By the way some argue that because household savings are disproportionately high in China because of worries about future social benefits, the best way to raise consumption is by putting more resources into pension and unemployment benefits, hospitalization, and so on.

13/15
The reasoning is that this will boost consumption by reducing savings.

This sounds more logical at first than it really is. Directly boosting income by some amount immediately increases the perceptions of income by that amount, and will cause higher spending.

14/15
Boosting the social safety net by the same amount will increase perceptions of income only to the extent that the former is credible. It could take years, even decades, to learn how much credibility to place in their future benefits. This reduces the impact on consumption.

15/15
The fact is that consumption in China is extraordinarily low, and that Chinese households do not believe they have enough income to allow them to spend more on consumption. The solution must be to increase their income directly.