Advertisement

Can Consumption Growth in China Keep Up as Investment Slows?

  • Mali Chivakul
  • Bernhard KassnerEmail author
Article
  • 1 Downloads

Abstract

China’s exceptionally large share of investment in GDP has been widely noted. Rebalancing away from investment to consumption has been on China’s agenda to realize more sustainable growth. As investment growth slows, the question is whether consumption could replace investment as a growth engine. This paper empirically explores the drivers of Chinese household consumption and specifically tests whether investment has affected household consumption beyond the standard income channel. Our empirical results using both national- and provincial-level data suggest that investment has had a significant impact on household consumption beyond the household income channel. The effects are particularly strong in the post-Global Financial Crisis period, suggesting that the Chinese government’s stimulus measures, which aimed mostly at investment spending, have significantly affected households’ decision to consume both through households’ current and expected future income channel.

Keywords

Reforms Investment Consumption China 

JEL Classification

E21 E22 E27 E44 E47 E52 C12 C32 C33 O53 

Notes

References

  1. Anderson, T.W., and C. Hsiao. 1982. Formulation and estimation of dynamic models using panel data. Journal of Econometrics 18(1): 47–82.Google Scholar
  2. Arellano, M., and S. Bond. 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies 58(2): 277–297.Google Scholar
  3. Arellano, M., and O. Bover. 1995. Another look at the instrumental variable estimation of errorcomponents models. Journal of Econometrics 68(1): 29–51.Google Scholar
  4. Bagliano, F.C., and C.A. Favero. 1998. Measuring monetary policy with VAR models: an evaluation. European Economic Review 42(6): 1069–1112.Google Scholar
  5. Baker, S.R., N. Bloom, and S.J. Davis. 2016. Measuring economic policy uncertainty. The Quarterly Journal of Economics 131(4): 1593–1636.Google Scholar
  6. Barnett, S.A., and R. Brooks. 2006: What's Driving Investment in China?, IMF Working Paper No. 06/265.Google Scholar
  7. Bernanke, B.S., and I. Mihov. 1998. The liquidity effect and long-run neutrality. Carnegie-Rochester Conference Series on Public Policy 49(1): 149–194.Google Scholar
  8. Blundell, R., and S. Bond. 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87(1): 115–143.Google Scholar
  9. Bruno, G.S.F. 2005. Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models. Economics Letters 87(3): 361–366.Google Scholar
  10. Buysse, K., D. Essers, and E. Vincent. 2018. Can china avoid the middle-income trap? NBB Economic Review 2018: 63–77.Google Scholar
  11. Celik, S, Aslanoglu, E and Uzun, S. 2010: Determinants of consumer confidence in emerging economies: A panel cointegration analysis. Topics in Middle Eastern and North African Economies 12.Google Scholar
  12. Chamon, M., K. Liu, and E. Prasad. 2013. Income uncertainty and household savings in China. Journal of Development Economics 105(C): 164–177.Google Scholar
  13. Chen, H., K. Chow, and P. Tillmann. 2017. The effectiveness of monetary policy in China: Evidence from a qual VAR. China Economic Review 43(C): 216–231.Google Scholar
  14. Chen, H., M. Funke, and A. Mehrotra. 2017. What drives urban consumption in mainland China? The role of property price dynamics. Pacific Economic Review 22(3): 383–409.Google Scholar
  15. Chen, W, Chen, X, Hsieh, C.-T and Zheng, M. 2019: A forensic examination of china’s national accounts. BPEA Conference Draft, Spring.Google Scholar
  16. Curtis, C.C., S. Lugauer, and N.C. Mark. 2015. Demographic patterns and household saving in China. American Economic Journal: Macroeconomics 7(2): 58–94.Google Scholar
  17. De Vos, I., G. Everaert, and I. Ruyssen. 2015. Bootstrap-based bias correction and inference for dynamic panels with fixed effects. Stata Journal 15(4): 986–1018.Google Scholar
  18. Dees, S., and P. Soares Brinca. 2013. Consumer confidence as a predictor of consumption spending: Evidence for the United States and the Euro area. International Economics 134: 1–14.Google Scholar
  19. Dieppe, A, van Roye, B and Legrand, R. 2016: The BEAR toolbox, ECB Working Paper Series 1934.Google Scholar
  20. Dion, D.-P. 2006: Does consumer confidence forecast household spending?, MPRA Paper 902 .Google Scholar
  21. Dumitrescu, E.-I., and C. Hurlin. 2012. Testing for Granger non-causality in heterogeneous panels. Economic Modelling 29(4): 1450–1460.Google Scholar
  22. Estrada, N., D. Garrote, E. Valdeolivas, and J. Valls. 2015. Household debt and uncertainty: Private consumption after the great recession. Monetaria 1: 71–109.Google Scholar
  23. Fan, C.S., and P. Wong. 1998. Does consumer sentiment forecast household spending? The Hong Kong case. Economics Letters 58(1): 77–84.Google Scholar
  24. Furlanetto, F., F. Ravazzolo, and S. Sarferaz. 2017. Identification of financial factors in economic fluctuations. The Economic Journal.Google Scholar
  25. Heim, J.J. 2010. The impact of consumer confidence on consumption and investment spending. Journal of Applied Business and Economics 11(2): 37–54.Google Scholar
  26. Horioka, C.Y. 2010. Aging and saving in Asia. Pacific Economic Review 15(1): 46–55.Google Scholar
  27. Judson, R., and Owen, A. L. 1997: Estimating dynamic panel data models: a practical guide for macroeconomists. Finance and Economics Discussion Series 1997-3 Board of Governors of the Federal Reserve System (U.S.).Google Scholar
  28. Kaplan, G., and G.L. Violante. 2018. Microeconomic heterogeneity and macroeconomic shocks. Journal of Economic Perspectives 32(3): 167–194.Google Scholar
  29. Kaplan, G., G.L. Violante, and J. Weidner. 2014. The wealthy hand-to-mouth. Brookings Papers on Economic Activity 45(1): 77–153.Google Scholar
  30. Kiviet, J.F. 1995. On bias, inconsistency, and eciency of various estimators in dynamic panel data models. Journal of Econometrics 68(1): 53–78.Google Scholar
  31. Kiviet, J.F. 1999. Expectation of expansions for estimators in a dynamic panel data model; some results for weakly exogenous regressors. In Analysis of Panel data and limited dependent variables, ed. C. Hsiao, K. Lahiri, L.-F. Lee, and M.H. Pesaran. Cambridge: Cambridge University Press.Google Scholar
  32. Koivu, T. 2012. Monetary policy, asset prices and consumption in China. Economic Systems 36(2): 307–325.Google Scholar
  33. Lee, I. H, Syed, M and Liu, X. 2013: China’s path to consumer-based growth: Reorienting investment and enhancing efficiency. IMF Working Paper No. 13/83.Google Scholar
  34. Lopez, H. B, Durre, A. 2003: The determinants of consumer confidence: the case of United States and Belgium. CORE Discussion Papers 2003053.Google Scholar
  35. Ludvigson, S.C. 2004. Consumer confidence and consumer spending. Journal of Economic Perspectives 18(2): 29–50.Google Scholar
  36. Ludvigson, S., C. Steindel, and M. Lettau. 2002. Monetary policy transmission through the consumption-wealth channel. Economic Policy Review 5: 117–133.Google Scholar
  37. Ma, G., I. Roberts, and G. Kelly. 2017. Rebalancing China’s economy: Domestic and international implications. China & World Economy 25(1): 1–31.Google Scholar
  38. Nabar, M. S. 2011: Targets, interest rates, and household saving in urban China. IMF Working Paper No. 11/223.Google Scholar
  39. Nickell, S.J. 1981. Biases in dynamic models with fixed effects. Econometrica 49(6): 1417–1426.Google Scholar
  40. Peltonen, T.A., R.M. Sousa, and I.S. Vansteenkiste. 2012. Wealth effects in emerging market economies. International Review of Economics & Finance 24(C): 155–166.Google Scholar
  41. Pounder Demarco, L. 2009: Consumption response to expected future income. International Finance Discussion Papers 971 Board of Governors of the Federal Reserve System (U.S.).Google Scholar
  42. Roodman, D. 2009. How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal 9(1): 86–136.Google Scholar
  43. Sims, C.A. 1998. Comment on Glenn Rudebusch’s “Do measures of monetary policy in a VAR make sense”. International Economic Review 39(4): 933–941.Google Scholar
  44. Soudan, M. (forthcoming): Quarterly National Account for China. ECB (forthcoming).Google Scholar
  45. Tsatsaronis, K, and Zhu, H. 2004: What drives housing price dynamics: cross-country evidence. BIS Quarterly Review.Google Scholar
  46. Wei, S.-J., and X. Zhang. 2011. The competitive saving motive: Evidence from rising sex ratios and savings rates in China. Journal of Political Economy 119(3): 511–564.Google Scholar
  47. Zhang, L. 2016. Rebalancing in China-progress and prospects. IMF Working Papers 16(183): 1.Google Scholar

Copyright information

© Association for Comparative Economic Studies 2019

Authors and Affiliations

  1. 1.IMFWashington, D.C.USA
  2. 2.Ludwig-Maximilians-Universität MünchenMunichGermany

Personalised recommendations