China's Consumption To Variable Factors

China’s residents’ consumption rate has declined rapidly and fallen into low levelin recent years. From the domestic perspective, the related time series shows obviousdowntrend. Residents’ consumption rate remains33.8%in2010which is not as muchas three-fourths of that in2000and only equivalent to two-thirds of that in1990. Suchphenomenon almost happens in all provinces at different degrees. The central andwestern regions, relatively higher than the east in level of consumption rate, aredropping at their fastest pace. From the international comparison, China’sconsumption rate is lower than those of the United States, the United Kingdom,Germany and other developed countries as well as those of neighboring countries likeJapan, Korea, and India who reaches similar level of economic development likeChina. In consumption rate ranking over the world, China only gets No.30frombottom. Study finds that the low rate may be partly down to differences in level ofeconomic development and industrial structure. But more factors must be containeddue to China’s situation.Through a deconstructive analysis of China’s consumption rate, paper revealsthat the rapid decline between2000and2010does not come from expansion of theregions’ economic differences, but from decline of provincial consumption rate. In thepast ten years provincial consumption rate leads the total residents’ consumption rateto decline up to7.3points. China’s low consumption rate is not caused by decline ofsome areas’ consumption rate, but by most provinces’ similar significant change.Applying both normative analysis and empirical analysis, namely, individualfixed effects model with provincial panel data on consumption rate’ change, weexplore several important results. Firstly, there shows a U-type relationship betweenprovincial consumption rate and area’s economic development level. The criticalpoint is where the actual GDP per capita (changeless price in2000)=28,800. Beijing,Tianjin, Inner Mongolia, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, andGuangdong have crossed over critical point, which means their consumption rates willgo up with the areas’ further economic development, given constancy of other factors.Secondly, gradual economic reform has brought uncertainty in the short term andinduced the consumption rate to fall sharply. Thirdly, Labor’s revenue share hassignificant positive effect on consumption rate. Though its immediate effect is limited, it can draw support from consumption inertia to enlarge consumption in long term.Lastly, Government spending, population structure, the prices change also affectresidents’ consumption rate.To distinguish urban and rural differences of effects from related factors, paperespecially build proper quantile regression. Detailed results are as follows: residentsconsumption behavior is strongly influenced by their inertia; government expenditurehas substitution effect on urban residents consumption and complementary effect onrural residents consumption; income plays significant impact on consumption asexpected, but they are not a simple linear relationship; marginal propensity toconsume changes at different income levels and manifests a U-type with incomeincrease. Then paper put some effort on the internal mechanism of this phenomenon.We think it is probably caused by consumption ethics and uncertainty or by lowmarginal propensity to consume of transient population. In either case, averagepropensity has dropped18points in recent ten years, which stimulates consumptionrate to decline7.7points. Meanwhile, income ratio goes down about5points andbrings consumption rate to fall about5points. The factors that result in propensity’sdecline have become most important reasons for downtrend of China’s residents’consumption rate, more than income to consumption.Therefore, the paper puts forward some thinking to boost consumption andexpand domestic demand. First, ensure steady and healthy economic development.Coastal areas should seize every opportunity to develop service-oriented tertiaryindustry and emerging industries so as to realize the structure optimization andupgrading while central and western regions should undertake, foster and developappropriate industry in terms of their local situations. Second, continuously promotesocial reform to release residents’ huge potential for consumption. Through reform ofhousehold registration, employment, social security welfare system, and medicaltreatment, gradually eliminate new dual structure, reduce residents’ precautionarysavings and increase average propensity. Third, enhance the share of labor’s revenueto strengthen residents’ consumption capacity. Create more job opportunities throughvarious ways, raise the minimum wage in a rational and sequential manner, promoteequal pay for equal work with no hesitation and implement Labor Contract Law tosettle the wage issues. Finally, optimize the structure of government expenditure andput in a decent shift of residents consumption ideas. Properly increase the weight ofpublic services expenditure, strongly improve the consumption environment, encourage residents to set up scientific consumption concept and promote residentsconsumption structure to upgrade.