China’s rise has been nothing short of breathtaking, but ordinary households saw only a limited share of the rewards of the country’s economic growth.<\/p>\n
This column is the first in a two-part series analysing the growth model and story of China\u2019s dramatic economic rise and the lessons to learn and unlearn from it, while contesting the recent debate on whether China shortchanged its domestic workers and consumers to meet globalist aspirations.<\/p>\n
A month before the Trump-Xi meet in Beijing<\/a>, China\u2019s National People\u2019s Congress approved the country\u2019s 15th Five Year Plan, which is Xi\u2019s third such plan as president. This plan prioritises \u201chigh-quality\u201d economic development \u2013 approximating a \u201cXi doctrine\u201d \u2013 in which China is no longer viewed as a developing nation but a developed one. For a nation to transition from one status to another while rapidly industrialising presents China as one of the most fascinating growth models to study and learn from.<\/p>\n China\u2019s economic rise has long carried a certain fascination for global policymakers, especially in the developing world. Few countries in modern economic history have industrialised as rapidly \u2013 over just a few decades \u2013 or reduced absolute poverty at such scale. China did so while enhancing productive capacity by enabling a dramatic transition of its workforce across sectors within the span of a single generation.<\/p>\n For many economists, China became proof that sustained state-led industrialisation could deliver material progress on a historic scale. In the last roughly ten years, India has also seemingly focused on using public investment as a strategy to crowd in private investment, domestically and internationally. However, it has had achieved more modest outcomes than China could. Therefore, there are useful lessons to be learnt from the China story and, despite its rise as a global power, also lessons to unlearn.<\/p>\n China\u2019s record on poverty reduction is not seriously in dispute. Between 1996 and 2022, consumption expenditure per capita grew by 8% annually<\/a> on average in the country, outpacing comparable East Asian economies at similar stages of industrialisation. Hundreds of millions crossed into material (self) sufficiency within a single generation. Any engagement with China\u2019s development story has to begin there, not as a concession, but as a fact that frames everything that follows.<\/p>\n Also read: The Self-Correcting Engine Behind China’s Economic Growth<\/a><\/p>\n Yet, rapid poverty reduction and fair distribution are not the same thing. An economy can dramatically improve living standards while still directing a disproportionate share of the gains from growth away from households and towards capital accumulation, export competitiveness and state-led investment. (An otherwise perceptive recent reflection on China\u2019s growth model by former Chief Economic Advisor to the Indian government, Arvind Subramanian<\/a>, treats these two questions as interchangeable.)<\/p>\n The issue is not whether Chinese citizens became better off. They clearly did. The more difficult question is whether household income kept pace with the extraordinary productivity gains generated by the economy. The share of household final consumption<\/a> in Chinese GDP is a better indicator of distribution than per capita growth rates alone. At roughly 40% of output today, the share of household consumption in China remains dramatically lower than that of the United States at 68%, Japan at 55%, South Korea at 48% and the OECD average, approaching 60%<\/a>.<\/p>\n Japan, often invoked as the regional precedent for high-speed industrialisation, never saw household consumption fall below roughly 50%, even during the peak of its post-war expansion. China\u2019s figure bottomed out near 34%<\/a> around 2010.<\/p>\n Between 2000 and 2020, China\u2019s real GDP expanded at an annual rate of roughly 8.7%<\/a>, yet household consumption remained persistently suppressed as a share of national output.<\/p>\n Much of China\u2019s gains from productivity growth were redirected towards earnings retained by corporates, state-led investment and industrial deepening rather than improving household purchasing power. China\u2019s labour share of GDP, hovering between 50 to 52%<\/a> during much of this period, remained comparatively low for an economy experiencing such rapid industrial expansion.<\/p>\n Subramanian acknowledges in passing that slower wage growth relative to productivity helped preserve China\u2019s export competitiveness. But this weakens his own argument more than he appears to recognise. A model that deliberately restrains wages below productivity growth in order to sustain export prices is, by definition, redistributing income from workers to producers. The mechanism does not become benign simply because living standards improved in absolute terms.<\/p>\n Also read: Did China’s Rapid Growth Come at the Cost of More Inequality?<\/a><\/p>\n The housing market reveals this distributive settlement starkly. In major Chinese cities such as Beijing, Shanghai and Shenzhen, the house price-to-income ratios<\/a> remain extraordinarily elevated by international standards.<\/p>\n Chinese Household Debt<\/a> as a percentage of GDP also reached an all-time high of 62.3% in March 2024, from a record low of 17.6% in December 2008. This was driven overwhelmingly by mortgage borrowing. The same households that benefited from decades of wage growth also watched an inflated asset market absorb those gains and households increasingly had to take on debt merely to secure urban stability.<\/p>\n High household savings rates are often presented as evidence of Chinese prosperity, a reflection of cultural thrift. The institutional explanation is less flattering.<\/p>\n