Extract

9.1 INTRODUCTION Economic reforms have marked the beginning of globalization in China with a sign of vigour and prosperity since 1978. It is commonly believed that globalization provides more and more countries with opportunities to enjoy higher standards of living. Indeed, China is one of the countries in the globalization era evidently and revolutionarily pulling hundreds of millions of people out of poverty towards higher standards of living. In the last quarter of last century, the real income per capita in China increased dramatically from US$241 in 1978 to US$1272 in 2004. Accordingly, the household saving ratio has also risen sharply over the same period. The share of savings in GDP has increased from 2 per cent in 1978 to 24 per cent in 2004. In sharp contrast, consumer confidence and private consumption spending over the same period in China have continuously declined and plunged to an exceptionally weak point in 2004, despite the interest rate being cut eight times over the period 1996 to 2004. The household consumption rate1 fell from 50 per cent in 1978 to 43 per cent in 2004, a record low consumption rate since 1952. The economic phenomenon in China in the globalization era seems to defy the traditional consumption hypotheses. The Keynesian absolute income hypothesis has played a key role in explaining aggregate consumption, which gave primary importance to disposable national income as the chief determinant of aggregate consumption, but its empirical inadequacies have led to development of the life-cycle hypothesis (LCH)...