China's household consumption will need to grow in a big way if it is to maintain its heady GDP growth rates in the decade to come.
The Chinese fixed-asset investment boom of the past decade has been, in a word, unprecedented. All low-income countries have required outsized capital stock additions to make the leap to middle-income status, but China's boom is unmatched by anything on the record books. In fact, by some measures of physical capital, China looks more like one of the world's leading developed economies, rather than the middle-income economy it is.
As a consequence, we see very little reason to believe China can continue to rely on building ever-more skyscrapers, highways, and manufacturing plants to sustain the kind of GDP numbers to which Chinese citizens and global investors have grown accustomed. In the next 10 years, the onus for growth will rest squarely on Chinese households and their willingness and ability to consume. If consumption fails to grow at a rate well above historical norms, the economy may be able to muster only 5% growth at best, a far cry from the 10% it averaged from 2001 to 2010.
A Decade of Growing Imbalances
The macroeconomic facts of the story provide a sense of just how dramatic China's fixed-asset investment boom has been.
In 2000, before the boom kicked off in earnest, gross capital formation (the GDP accounting term for investments in physical capital, otherwise known for its abbreviation, GCF) accounted for 35% of Chinese economic output. While large by developed economy standards (the U.S. 10-year average is 19%, Japan's is 23%), it wasn't terribly atypical for a high-growth emerging economy. Nor was it unusual for China: A decade prior, GCF also had a 35% share. The consistent share of GCF reflected the balanced growth China enjoyed in the 1990s. By 2000, the Chinese economy was 170% larger than it was in 1990, driven by a 173% increase in investment and an only slightly lower 156% increase in consumption.
Chinese GDP expanded at a similarly impressive rate in the 2000s. By 2010, the Chinese economy was 171% larger than it was in 2000. But by then, the sources of growth were anything but balanced. A massive share came from a surge in fixed-asset investment. China was spending 273% more on physical capital than it was in 2000, with GCF accounting for a staggering 49% share of output by decade's end. Yet households were "only" consuming 97% more than they were in 2000, depressing the share of household consumption of total GDP to 34% in 2010, a paltry share by any standard and the lowest level seen in China since the founding of the People's Republic.