Consumption, Income Distribution, and State Ownership in the People’s Republic of China

Abstract

It is income rather than the peculiar saving behavior of Chinese households that constrains consumption in the People’s Republic of China. The low share of consumption in gross domestic product (GDP) is consistent with the reduced share of GDP of wage earnings—a major source of household income. Corporate savings, which accounted for 23% of national income in 2007, contributed most to the significant increase in the gross national saving rate. The surging corporate savings was mainly due to the bias of income distribution toward capital. The profits of state-owned enterprises (SOEs) made with monopolistic power and government support comprises a substantial part of corporate savings. A series of enterprise reforms have made SOEs leaner and bigger, and transformed a handful central SOEs into monopolies in highly profitable industries. Retained profits by SOEs only benefit managers and employees in these firms, not the general public who are their true owners. The empirical analysis indicates that high levels of compensation by SOEs contributed to rising inter-industry income disparity. To boost domestic demand, it is essential that the government address the bias in distribution between SOEs and households. Collecting dividends from SOEs to fund social welfare systems or direct income transfers to low-income families will reduce the gross national saving rate, boost consumption, and more importantly, mitigate social inequality.