Authors: Xin Meng, Sen Xue and Jinjun Xue, ANU

For China, the global financial crisis marked the turning point from an export-oriented to a domestic demand-driven economy. In late 2008 and early 2009, China’s exports fell by more than 20 per cent, alerting Chinese policymakers to the unreliability of growth depending purely on exports. This transition to domestic demand-driven growth is still going, and its success, to a large extent, will depend on the consumption and saving decisions of China’s households.

China has an unusually high household savings rate, largely due to precautionary saving motives. Before the reforms of the late 1970s and 1980s, urban residents enjoyed cradle-to-grave social welfare coverage. In the 1990s, market-oriented reform gradually eroded these free public services and social security, leaving households responsible for funding their own needs. Reforms to housing, education, pensions and health care required households to be more forward-looking and cautious. Household savings in cities increased dramatically.

Rural savings were transformed by the change from communal welfare provision to the household responsibility system. Before these reforms, the commune looked after elderly individuals in rural areas and provided a low level of welfare. After the household responsibility system was introduced, most commune-provided social welfare disappeared. Households needed to save for their lean days.

People living in urban areas tend to spend more of their income than their rural counterparts. This is not only because urban dwellers have higher incomes, but also because urban centres provide more options for consumption, generating demand.

One way to move towards a domestic demand-driven development strategy should be to encourage more migration, especially in an economy where unskilled labour is in short supply in cities. But the Chinese government has so far not fully realised the link between migration and consumption-driven growth. This can be seen in the slow progress made in helping more people to migrate and assisting workers who have already migrated to settle permanently in cities.

Migrants in China are, in general, treated as ‘guest workers’. Despite their significant contribution to economic growth, they are restricted in the types of job they can obtain and in their access to social services in destination cities. These restrictions prevent migrant workers from staying in cities in the long run and also from bringing their families.

In recent years, the central government has realised the drawbacks of the ‘guest worker’ system, introducing new laws and regulations to protect migrants’ benefits and increase their access to services. These attempts to eliminate discrimination against migrants have had rather limited success for systemic reasons.

Take children’s schooling as an example. Although the central government has announced policies that mean migrant children should be allowed to enrol in urban public schools, local governments were expected to fund these children’s education. But as local governments’ priority is to provide the best services for their local constituents, they have been reluctant to implement this policy. As a result, most migrants leave their school-aged children in their hometown. Even in 2014, almost half of migrants’ children were still being left behind in rural areas.

Over the past eight years, there have been some improvements in social services and welfare provision for migrants, but the pace of improvement is slow. Although a 2008 law requires all employers to pay social insurance for migrant workers, in 2014 only 30 per cent of migrant workers had pensions or health insurance. Less than 26 per cent had unemployment insurance.

Our research, published in the 2016 China Update, finds that the longer migrants stay in the city, the more they consume in the first 36 years of their working life. This likely reflects an assimilation process in terms of consumption behaviour. Due to institutional restrictions on family migration, Chinese internal migrants are less likely to stay in cities in the long term. The median length of migration currently stands at eight years, far below the point at which consumption starts to taper.

Whether or not the migrant household head has pension or health insurance also affects consumption patterns. Individuals with social insurance have less to worry about and hence are willing to spend more. Indeed, if a household head does not have health or pension insurance, the family’s per capita consumption reduces by 6–8 per cent.

China’s future development will rely heavily on domestic demand, which in turn, relies heavily on the urbanisation process. Yet China’s institutional settings, which restrict permanent settlement of rural–urban migrants, could be detrimental to its smooth transition from an export-oriented to a domestic demand-driven economic growth path.

In our paper, we use seven years of survey data to demonstrate how these institutional restrictions directly curbed the consumption of 166 million migrant workers. In particular, migrants with family members left behind are consuming considerably less in cities than their counterparts who brought their family members with them to the city.

Migrants without social insurance are the major precautionary savers. In 2014 less than 35 per cent of household heads were covered by either health or pension insurance. Resolving the problem of social insurance coverage for migrant workers could contribute significantly to an increase in domestic demand.

Among migrant workers, it is the low-income group that has very low levels of social insurance coverage and the propensity to save is highest among the poor. So, promoting social insurance among the poor should have a significant positive impact on consumption.

Institutional restrictions on migration affect consumption in many ways. Among these are the short average duration of migration, family members being left behind and precautionary saving due to a lack of social welfare coverage. If China is to truly embrace demand-driven development, addressing these problems must become a priority.

Xin Meng is Professor at the Research School of Economics, The Australian National University.

Sen Xue is a Research Fellow at the Research School of Economics, The Australian National University.

Jinjun Xue is Professor at the School of Economics, Nagoya University.

This article is a digest of the authors’ chapter from the publication for the latest China Update held at the ANU on Friday 22 July. The e-book is available here.