China’s underconsumption is neither a half-truth nor a myth. Here are three reasons why.
One, the contribution of private consumption to China’s economy is abnormally low. In 2024, it accounted for a mere 40 per cent of its GDP. Between 2006 and 2022, it averaged just 37, dipping to an all-time low of 35 in 2010-2011. In comparison, the global average is around 60 per cent.
This wasn’t always the case, though. Between 1952 and 1977, just before the reform and opening up, household consumption made up 58 per cent of the country’s GDP. The same between 1978 and 2001 averaged 49 per cent. Finally, in the post-WTO accession period, the average dropped to 39 per cent. Thus, there has been a consistent decline in the role of private consumption in China’s economy.
Examining the aggregate values of private consumption further exposes glaring differences. China’s aggregate household consumption today stands at ~US$ 7 trillion. But this is abysmally low for a US$ 18 trillion economy. In comparison, the US, with a GDP of ~ US$ 29 trillion, boasts household consumption of over US$ 19.5 trillion. The corresponding figure for the EU, at ~ US$ 20 trillion GDP, is ~US$ 10.4 trillion.
More interestingly, the US equalled China’s current consumption levels at around US$ 10.58 trillion of GDP (2001). India will likely equal China’s current consumption levels at US$ 11.6 trillion of GDP. Second, the claim that the “suppressed consumer is a myth” does not hold when tested against China’s domestic savings. Against the global average of 26 per cent between 2000 and 2023, the corresponding figure for China stood at 46 per cent. Savings and consumption share an inverse relationship. Thus, the only way to amass an extremely high savings rate is to subdue domestic consumption.
Finally, a country’s investment rate is positively linked to its domestic savings. In China’s case, this translated into high investment rates. Since the turn of the century, China has sustained an extraordinary investment rate of ~43 per cent against the global average of ~25 per cent. And no other country has averaged an investment rate higher than China during this period.
Thus, the claim that the share of consumption in China’s GDP has remained low because “investment has grown even faster” is flawed. The investment rate in China has remained high because savings have remained extremely high, which in turn was made possible by suppressed consumption.