How Should Chinese Consumers Rebalance?

China has more to gain from reducing fear-driven precautionary saving than from boosting labor income.

Structural rebalancing — shifting the sources of economic growth from one sector to another — is a daunting task for any nation. That’s especially the case for China and its deeply entrenched producer-led growth miracle of the past 45 years. However compelling the case is for Chinese consumer-led rebalancing — a point that I and others have stressed for years — there is no quick and easy recipe to shift the internal drivers of economic growth.

Last week, I argued that the time has finally come for China to end an increasingly ponderous debate, pick its best strategy, and get on with the heavy lifting of consumer-led rebalancing. I suggested that the upcoming 15^th Five-Year Plan should endorse a specific target of a 50% household consumption share of GDP by 2035 — a ten-percentage point increase from the 40% share of 2023. Targets provide discipline and focus, which in this case, would go a long way in galvanizing public support for rebalancing. To hit the 50% target, I calculated that household consumption growth would have to average 7% over the 2025 to 2035 period, slightly more than double the 3.3% pace for the non-consumption remainder of the rest of the Chinese economy.

Easier said than done, argued many readers who insist that Chinese DNA is congenitally predisposed toward the thrift of excess saving and underconsumption. A reply from my good friend, Martin Wolf, the chief economics commentator for the Financial Times, was more specific. He argued that China has essentially two options for consumer-led rebalancing — to lower the personal saving rate or to boost the household sector share of national income. Martin took issue with my emphasis on reducing the excesses of fear-driven precautionary saving, stressing that Chinese consumer-led rebalancing couldn’t occur without a major shift in the distribution of Chinese national income toward the household sector.

I dashed off a quick response, arguing that it didn’t have to be either/ or, but more likely a combination of both — namely, consumer-led rebalancing driven by a combination of reduced personal saving and a redistribution of national income in favor of Chinese households. Martin, being the gentleman that he is, agreed, and we both went off to tackle other weighty issues. But the exchange left me with a gnawing feeling of figuring out a more precise way to sort all this out.

This is a key issue for Chinese policymakers. How should they prioritize the imperatives of consumer-led rebalancing? More specifically, to Martin’s point, how can we assess the relative leverage that might come from focusing on the saving channel versus that which might be available from shifting the distribution of national income?

My basic answer is that China has far more to gain from reducing excess saving than from boosting subpar household income. I draw that conclusion from a comparison of China’s latest data on household saving and the household sector income share of GDP relative to the norms of OECD developed economies. The deviations from advanced-economy norms are important in thinking about the rebalancing strategies necessary to achieve Xi Jinping’s aspirational goal of a “moderately well-off society.” Such rebalancing would effectively put China on the rejuvenation trajectory, a growth path that I have previously defined as leading to convergence of per capita GDP for China with that the advanced economies by 2049.

So, what do the numbers show? As illustrated in the chart below, the latest data put China’s household saving rate at around 35% of disposable personal income, fully 28 percentage points above the OECD average of 7%. At the same time, China’s labor income share is about 51% of GDP, seven-percentage points lower than the OECD average of 58%. Consumer-led rebalancing, in my view, would need to draw on the convergence of Chinese household saving rates and income shares toward OECD norms over the 2025 to 2049 period. With the saving rate normalization gap of 28 percentage points about four times the seven-percentage point labor income shortfall, China’s high personal saving rate is far more of an aberration than its low labor income share. Hence, my conclusion that China’s consumer-led rebalancing toward the OECD proxy of a moderately well-off society would need to be associated with a much greater impetus from reduced household saving than from an increase in labor income.

Of course, the concept of “OECD norms” masks a wide disparity in the dispersion of household sector saving rates and labor income shares. Household saving rates, by OECD metrics, range from a low of 5.5% in the US (2024-25) to a high of 15.4% in the Euro area. For China, with its inadequate social safety net, convergence to US household saving norms seems highly unlikely. The dispersion of labor income shares within the OECD is considerably tighter than for saving rates, with the US at 60% and Europe at 58%. Consequently, for both saving rates and labor income shares, the OECD average seems like a reasonable target to gauge the convergence metrics of Chinese consumer-led rebalancing,

As I stressed in response to Martin Wolf’s argument, it’s not either/ or. I take his important point that Chinese workers need a much larger share of national income than is currently the case. That can be achieved by a variety of policies — raising minimum wages, further urbanization that moves workers from low-wage rural occupations to higher-wage urban areas, and increased direct transfers from the government and state-owned enterprises. At the same time, I continue to believe that an expanded social safety for retirement, healthcare, and hukou reform should be given the highest priority in reducing the fear-driven excesses of precautionary saving. With China’s household sector saving excesses far outstripping its compression of labor income, the relative leverage for a consumer-led rebalancing strategy should be framed with that key consideration in mind.

In the end, there is an important cultural aspect to China’s rebalancing imperatives that must also be taken into consideration. The central planning legacy of the Mao era has had an enduring impact in instilling the mindset of China’s producer model. The reforms and opening up of Deng Xiaoping only deepened the nation’s commitment to producer-led growth as an antidote to China’s economic struggles of the 1960s and 1970s. Powered by surging investment and exports, in conjunction with an early wave of state-owned enterprise reforms that led to the wholesale elimination of the “iron rice bowl” — cradle-to-grave social support for a large number of Chinese workers — the consumer was all but left out of modern China’s growth equation.

Shifting the focus, from an economic engine that has long relied almost exclusively on the producer model to one that allows for greater support from the consumer model, entails a major change in the character of Chinese economic growth. Establishing a 2035 target for a 50% household consumption share of GDP in the upcoming 15^th Five-Year Plan would go a long way in underscoring Beijing’s commitment to a more balanced growth culture.