In July 2024, the Rhodium Group’s Logan Wright and various associates published an insightful research paper on their expectations for China’s long-term consumption growth. In it they state:
In the absence of significant fiscal reforms, long-term household consumption growth is likely to slow to around 3–4% per year in real terms over the next five to ten years. At most, household consumption will contribute around 1.5 percentage points of GDP growth per year, which is likely to limit overall long-term GDP growth to around 3%, given the known headwinds to faster investment growth.
Any projection of long-term consumption growth is likely to be highly uncertain because, as the authors acknowledge, growth depends fundamentally on politically difficult structural reforms concerning the macro distribution of income. Their estimate, however, is clearly reasonable, and is in line with the experiences of other countries whose rapid investment-driven growth was—like that of China’s—underpinned by significant imbalances in the shares of investment and consumption.
The imbalances matter because, together with consumption growth estimates by Rhodium Group and others, they help us frame China’s medium- to long-term growth trajectory. China has the deepest economic imbalances in history, with investment representing 42 percent of GDP in 2023 (versus a global average of 24 percent), consumption representing 56 percent (versus a global average of 76 percent), and net exports representing the rest. These imbalances are so extreme that even if China were able to raise the consumption share of GDP by ten full percentage points and reduce the investment share also by ten full percentage points, China would still have among the highest investment shares of any country (even higher than most developing countries with much faster growth rates) and among the lowest consumption shares of any country.
If we assume that the Rhodium Group is correct in its expectations, there is quite a lot we can say about the evolution of Chinese growth during this period. To begin with, the only sustainable way to increase consumption over the long term is to increase household income during that period, whether household income increases directly or indirectly (through transfers).
That’s because for total consumption to grow faster than household income, there must be either a contraction in household savings or a rise in household or fiscal debt (in the latter case to fund increased transfers to households). For the same reasons, for total consumption to grow slower than household income, there must be either an expansion in household savings or a reduction in household or fiscal debt. While each of these scenarios is possible, there are likely to be constraints on the extent to which household savings and household and fiscal debt can expand or contract.
What does an average growth rate in household income and total consumption growth of 3–4 percent for the next ten years tell us about the extent and structure of growth in Chinese GDP? The answer depends on the assumptions we make about the extent to which China rebalances its economy in the next few years. There are basically three rebalancing scenarios that define the relationship between GDP growth and consumption growth.
In the first (very unlikely) scenario, over the next five to ten years, GDP grows faster than consumption (i.e. China’s internal imbalances will deteriorate even further). In this case there are only two ways to balance a growing gap between GDP and consumption growth: either investment will have to grow even more quickly than GDP, or China’s trade surplus must surge.
The problem with relying on faster growth in investment, as the Rhodium Group’s paper notes (as do a rising number of Chinese economists), is that investment—especially in expanding infrastructure—is increasingly nonproductive and simply stores up greater adjustment difficulties for China in the future. As more resources are used to generate declining economic value, the gap between the two can only be temporarily bridged by rising debt, but there is a limit to how much China can rely on growing debt to bridge the gap.
The problem is compounded by the fact that the value of infrastructure investment is itself a function of growth in the economy, which means that as growth slows, the value of the investment will decline even further, thereby making it more difficult for local governments to service the associated debt without increasing transfers from other parts of the economy. This has always been a major weakness of the investment-driven growth model: the self-reinforcing relationship between growth and investment works not just on the way up but also on the way down.
But if over the next five to ten years GDP grows faster than consumption, and if there isn’t a rise in the investment share of GDP, the only other way to balance the gap between GDP and consumption growth is with a surge in China’s trade surplus. Given China’s size, however, and the intensifying global trade conflict, a sustained increase in China’s trade surplus is pretty unlikely.
In the second scenario, China’s GDP grows in line with consumption. In that case, the Chinese economy will still be extremely unbalanced, but at least the imbalances will not get worse. This means, however, that China’s long-term GDP growth will largely be a function of its long-term consumption growth. It also means that the rest of the world must continue to absorb Chinese imbalances, with the amount it must absorb growing if Chinese growth exceeds global growth. For these reasons this scenario is also fairly unlikely.
In the third – and most likely – scenario, China either chooses or is forced by rising debt and a deteriorating global trade environment to rebalance its economy, which means by definition that GDP growth will be lower than the growth in total consumption. How much lower depends on how quickly China rebalances. As I explain elsewhere, if we assume that over ten years, China is able to reduce the investment share of GDP and raise the consumption share by ten percentage points, 3–4 percent growth in total consumption is consistent with 1–2 percent growth in GDP (and negative investment growth).
These three scenarios map out nearly all the various ways in which the Chinese economy can grow, with China’s future growth trajectory hinging on two variables: the expected consumption growth rate (which, we can assume, is broadly equal to the growth rate in household income) and the assumed pace of rebalancing. The value of exercises like that of the Rhodium Group’s paper is that once we work out a reasonable estimate of consumption and household income growth—and make further assumptions about the extent to which external conditions and rising debt force the pace of China’s economic rebalancing—it is quite easy to figure out arithmetically China’s long-term GDP growth trajectory.
Ultimately, however, it is highly unlikely that China can continue to increase or even maintain the current extraordinarily high investment share of GDP for more than a few years, nor can the world continue to absorb rising Chinese surpluses. That’s why over the medium to long term, the most likely scenario is that China will reverse its deep imbalances, in which case China’s long-term GDP growth rate will be equal to the long-term growth rate of consumption less the impact of rebalancing. That’s also why Beijing’s top economic priority must be boost the consumption growth rate in a way that is sustainable over many years. If China’s average consumption growth rate is indeed 3–4 percent over the next five to ten years, that must also be the upper limit of China’s GDP growth rate.
