A Study On The Imbalnace Of Demand Structure During China’s Economic Growth Process

There exists an imbalance of demand structure during China’s rapid economic growth. This paper firstly conducts a comparative analysis of the demand structure of the household, corporate and government sectors,using the flow-of-fund account of China over the period of1992to2011.Then based on the World Development Index Database,this paper summarize the common feature of the investment rate and consumption rate from worldwide aspects.Next, the author explain the mutual influence mechanism between the stock-flow imbalance,income gap and demand structure imbalance,based on an income-expenditure model which reflecting the investment decision of firms. And the paper also provide some empirical evidence to this issue by using the vector error correction model. After that, the author analyzes China’s demand structure imbalance by presenting a five sector stock-flow consistent model which incoporats the real and financial side of the capitalist economy. And the paper use numerical simulation to check the impact on demand side from investment shock,wage share shock,saving propensity shock,tax cut shock and interest rate shock.The main results are as follows.(1)On a basis of the flow-of-fund account for China, this paper found that low consumption rate in China was due to both the decreasing household disposable income share and rising propensity to save out of household’s income, as a result of the downward trend in labor compenstion share. We also found that the rising investment rate in the corporate sector was mainly due to the corporation profits. The latter was caused by the falling share of labor compensation and by the rising government investment and the increasing current transfers from the government sector to the corporate sector. Our analysis indicates that the imbalance of demand structure is directly related to the distribution of national income.(2)The rising ratio of capital stock to income flow is an important factor resulting in the imbalance of demand structure in China. Increase in the capital stock to income flow ratio will cause the structural imbalance of income distribution between the wage and the capital cost, where capital cost refers to depreciation and interest expenses. Investment will not only increase the capital stock in current period, but will also increase the capital consumption allowance and interest expenses. In order to maintain the profit rate, the corporate sector will have to raise the growth of investment in the next period. As a result, this will raise capital cost to wage ratio and the ratio of capital return to wage, where capital return concludes interest income and net profits. Due to the high saving propensity of capital cost and capital return, this will increase the national saving rate and lead to insufficient consumption demand.What makes stock-flow imbalance in China is mainly resulted from the implementation of overtaking strategy and the investment-driven growth strategy. However, as we have said, investment will lead to rising capital stock-income flow ratio, and this process was not sustainable. Dropping in the investment growth and the nominal value of capital stock will rebalance the economy. This means that the government have to abandon the over reliance on the investment-driven growth and tilt the balance towards boosting consumption growth.(3)Investment acceleration, increasing capital share and higher saving propensity,all of these factors will reduce the consumption rate.Tax cut and a rise in interest rate tend to increase the consumption rate.The policy implication is to get rid of the over reliance on the investment-driven growth regime. We should abandon the capital-oriented income distritution system and try to enhance consumption propensity of the household. Also we could reduce the tax burden of household and reform the financial system such like marketization of interest rate.