For example, three of the fastest growing consumption categories are gold and jewellery, household furnishings, and household appliances. I would argue that all of these should really count as investments. The latter two will drop dramatically as investment – especially in real estate – dries up. Gold and jewellery hoarding will decrease once the financial repression tax is eliminated. Second, if both consumption and income are understated it does not necessarily follow that its share of GDP is more than 35%. This would only be the case if the ratio of hidden consumption to hidden income is greater than 35%.
“Many analysts are muddled about the differences between absolute consumption levels and the consumption ratio, and so they believe that if they can show that consumption is higher than claimed by the National Bureau of Statistics, the imbalance is less of a problem. It isn’t.”
If most of the hidden consumption and income belong to the rich or very rich, as is commonly assumed, it may well be that the true ratio is lower than 35%. Many analysts are muddled about the differences between absolute consumption levels and the consumption ratio, and so they believe that if they can show that consumption is higher than claimed by the National Bureau of Statistics, the imbalance is less of a problem. It isn’t. What matters is the consumption share of all that is produced, and if both GDP and total consumption are higher than the official numbers, China’s imbalance is not necessarily better. It may even be worse. And it is this imbalance that matters to China’s growth prospects. Finally, we are not talking about small imbalances: The reported consumption share of GDP is astonishingly low and so an error in the data would have to be enormous for it to matter to the rebalancing debate. Even if it turns out that 20% of Chinese consumption, and none of its income, were hidden and unrecorded in the statistical data, China would still easily have the lowest consumption rate of any major economy in the world. IDEAL LEVELS Globally, consumption represents a fairly stable 65% of GDP. Over the past decade this average has encompassed a group of high-consuming countries, such as the United States and most EU member states whose average consumption exceeded 70% of GDP, as well as a group of low-consuming countries, found mainly in Asia, whose average consumption – excluding China – ranged from 50% to 58% of GDP. This distribution of over- and under-consumption should change in the next few years. It is unlikely that the high-consuming countries will be able to maintain their excess levels for the rest of this decade. Their consumption rates are already coming down substantially. Europe is in crisis while the United States is taking steps to raise its savings rate in an attempt to reduce its current account deficit. Japan, although already a relatively low-consuming country, is also likely to try to increase its savings rate in order to fund its
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