Is China consuming more than we think?


Most readers will be familiar with the work of Michael Pettis who has boldly led global perceptions of Chinese growth away from Panglossian views to worries over imbalances. The nub of concern is that the investment portion of GDP growth is unsustainably large at 49% and is driven by a debt bubble that risks implosion at some point. The solution, of course, is to rebalance towards consumption driven growth to make ongoing development sustainable, even if it is at a slower race.

Now David Piling at the FT asks what if the statistics are, in fact, wrong?

That is the intriguing claim by two academics, Jun Zhang and Tian Zhu, respectively of Fudan University and China Europe International Business School, who argue that consumption has been consistently underreported. In a recent paper they find three important areas of undercounting. One is housing. China, they argue, does not properly account for “imputed rent”, an estimate of how much owner-occupiers would need to pay if they were renting. Second, they say, a lot of private consumption shows up in statistics as corporate expenses. For example, many executives pay for their private car on the company account. Although this appears in official data as investment, it is really consumption.

Third, and most important, they argue, GDP surveys underrepresent high earners, who may not relish the idea of officials with clipboards noting down their every expenditure. If high-income households are missing from the survey, so is their consumption. Taking these three factors together, the two academics calculate that China underestimates consumption by 10-12 percentage points.

That view, though still a minority one, has some support among investors. Jonathan Garner, head of Asian and emerging market equity strategy at Morgan Stanley, has long argued that Chinese consumption is higher than captured in official statistics…Mr Garner puts capital investment at 41 per cent of GDP in 2012, not 49 per cent. “Our data suggest the transition to consumption-driven growth has already been under way for some time.” That, he says, is borne out by concrete data. Car sales, for example, are growing by 13-14 per cent, double the pace of the economy. Consumer-related stocks have long outperformed industrial ones.

I will note in passing that it doesn’t matter how fast cars sales are growing if investment components are growing even faster, which has been the case. He’s making the wrong comparison.

Anyway, I can’t really judge the argument beyond that except to say that the slowing of the output dividend from each new yuan of debt is also very indicative of over-investment that has lost touch with commercial rates of return. Hence lousy stock performance for industrials.

Aside from that, I’m not sure why the Chinese authorities would themselves be so keen on rebalancing if there were no need.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. FT recently ran a Kaminska piece arguing the China is NOT over investing. There have always been pundits suggesting consumption is under-reported (and didn’t a recent post of yours suggest domestic demand was strong).

    The authorities will no doubt eventually guide the economy away from investment growth but not any time soon. Of course they play lip service to the current meme of rebalancing but are cognizant a giant craft turns slowly. Feeding the chooks and keeping the experts happy. Meanwhile business as usual.