January 2010

The People’s Republic of China (PRC) plays a key role in U.S. policy toward the Democratic People’s Republic of Korea (DPRK or North Korea). The PRC is North Korea’s closest ally, largest provider of food, fuel, and industrial machinery, and arguably the country most able to wield influence in Pyongyang. China also is the host of the Six-Party Talks (involving the United States, China, North Korea, South Korea, Japan, and Russia) over North Korea’s nuclear program. The close PRC-DPRK relationship is of interest to U.S. policymakers because China plays a pivotal role in the success of U.S. efforts to halt the DPRK’s nuclear weapons and ballistic missile programs, to prevent nuclear proliferation, to enforce economic sanctions, and to ensure that North Korean refugees that cross into China receive humane treatment. This report provides a brief survey of China-North Korea relations, assesses PRC objectives and actions, and raises policy issues for the United States.

Consumption in China is unusually low and has continued to decline as a share of GDP over the past decade. A key policy question is how to reverse this trend, and rebalance growth away from reliance on exports and investment and toward consumption. This paper investigates whether the sizable increase in government social spending in recent years lowered precautionary saving and increased consumption. The main findings are that spending on health, but not education, had an impact on household behavior. The impact, moreover, is large. A one yuan increase in government health spending is associated with a two yuan increase in urban household consumption.