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Chinese consumption grossly underestimated

By  Zhang Jun and Zhu Tian (Global Times)

09:00, January 25, 2013

It is now considered conventional wisdom that the Chinese consume too little and save too much, and China's reluctant consumers have contributed to the global economic imbalance. But the truth is that China's consumption is grossly underestimated. China's true rate of consumption can be 10 to 15 percentage points higher than official figures, reaching 60 to 65 percent of GDP, a desirable rate for a fast-growing developing economy. Rich countries mired in their own economic quagmires need to find domestic solutions instead of blaming China for consuming too little.

There are several sources of underestimation of consumption in China's official data. Firstly, Chinese statistics have significantly underestimated housing consumption including rentals, utility and decoration expenditures. Rentals include actual rents paid by tenants and more importantly, imputed rents for owner-occupied homes. In practice, calculating imputed rent is not an easy task. China's statistics bureau uses construction costs multiplied by a fixed depreciation rate for a rough estimate. While this method is easy to employ, it greatly underestimates actual housing consumption. For starters, construction costs, which do not even include land costs, greatly underestimate the market value of housing, and the 2 percent depreciation rate applied for urban housing also underestimates the rental rate of return. Using this method, China's housing consumption accounted for only 6 percent of GDP in 2009. In contrast, housing consumption in high-income countries such as the US, Japan, UK, Germany, France and Canada took up around 14 percent of GDP in the same year; while in Mexico and Turkey, it accounted for 11 percent and 16.5 percent of GDP respectively.

The second source of consumption underestimation comes from the fact that official statistics cannot account for private consumption that is paid for by company accounts and thus treated as either business costs or, in the case of durable goods, as investment expenditures. Such consumption is commonplace in China. For example, many business owners and executives purchase private cars on company accounts. Instead of being counted as private consumption, the costs of these cars are counted as investment expenditures. Actually, we suspect that most imported luxury cars in China are purchased this way. This practice also extends to vacations, dining, mobile phone bills, gasoline purchases and many kinds of household good sales. It saves significantly on corporate as well as personal income taxes. It is also a benefit or in-kind consumption for executives at State-owned firms. Of course it's impossible to know exactly how much of such consumption is unaccounted for. If it makes up, say, 10 percent of total household consumption, then China's rate of consumption would increase by 3.5 percent.

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