What Role Should Expansion of Domestic Demand Play?

[2009-01-21 10:51:41]

As the global economic downturn triggered by the subprime lending crisis progresses, the changes of China's major economic indexes is fairly meaningful. The third quarter GDP growth stands at 9.9 percent this year, a year-on-year increase of 2.3 percent, while the contribution rate of foreign trade to economic experienced a yearly decrease of 8.9 percent.

China, which heavily depends on external economy, is facing a severe challenge as the financial tsunami is spreading to the substantial economy. The external demand is weakening and rgw decrease of export can not be offset in a short period of time. The expansion of domestic demand is imminent. What role should the expansion of domestic demand play in such a grave situation? Where does its emphasis lay? And is there any policy for it to develop?

Investment

Maintaining a reasonable pace, ensuring job opportunities

There are two parts in expansion of domestic: increasing investment and encouraging consumption. Yang Yiyong, director of Institute of Social Development under National Development and Reform Commission (NDRC) noted that it was much in evidence to witness the role of consumption on economic growth. However, China should attach more emphasis to investment now, the public investment in particular.

China has taken a series of macro-control measure to tackle major economic problem resulted from over-heated investment. The narrowing difference between investment and consumption does not mean the current investment scale is reasonable. Judged from a global economic perspective and China's development, investment should always be a vital driving force of growth.

China witnessed a 27 percent increase of social fixed assets investment in the first three quarters this year. The growth was mainly generated by projects in construction, and the new projects are in great need of investment, for instance, the investment in textile has dropped below the ten-year average line.

The slowdown of industrial growth and the shrink of corporate profit have brought enterprises' profits down to 19.4 percent, a yearly decrease of 17.6 percent. The investment and trade in Yangtze and Pearl Rive Delta Regions cooled down, and enterprises' new credit demand declined. The slowing growth of investment in real estate sector will bring great pressure on future assets investment.

Li Xiaochao, spokesperson with National Bureau of Statistics, said stable growth of investment is a precondition of steady economic development. The focus now should be on government investment, reconstruction of quake-hit areas and project development in terms of agriculture, water conservancy, power, communication, urban construction as well as people's livelihood.

Investment contributed to 40.9 percent of GDP growth last year, and the public investment in infrastructure construction has provided people with jobs and income. Yu Yongding, director of Institute of World Economics and Politics under Chinese Academy of Social Sciences, noted the expansion of domestic demand could achieved through enlargement of government investment, but a new round of blind expansion and waste of resources must be avoid. Apart from Beijing-Shanghai high speed railway, metropolitan underground, nuclear power, the emphasis of investment should be place on consumption expansion and structure improvement, increase of public products supplying, people's livelihood and service industry, namely, community nursery, kindergarten, hospital, school, convenience-for-people facilities, which will boost consumption demand.

According to one CPPCC member, the corporate investment, which is of weak staying power, needs to be granted more favorite policies, especially for those SMEs that created the majority of jobs, in terms of reducing tax and arousing enterprises' passion in investment. The restriction on private capital should be lifted, which will make the private investment yield well.

Consumption

Focusing on improvement of people's livelihood, raising income and stabilizing expectation

The expansion of domestic demand is dependent on enlargement of consumption

China took actions to improve inadequate consumption in past years, which pushed economy to grow by 4.5 percent. The retail volume of social commodities in the first three quarters this year grew by 22 percent, a 6.1 percent increase over the same period last year, and it will be 14 percent, the highest level since China adopted reform and opening-up policy 30 years ago, if price factor were not considered. It is thought to be the golden period for national consumption to grow.

However, the consumption rate in China is still relatively low, with that in 2007 registering only a disappointing 49 percent, lower than world's average level of 61 percent and the average for the developing countries. The imperfect urban and rural social security system and ambiguous resident's income expectation bring about limitation for the growth of consumption demand.

The core of consumption stimulation lies on income growth. Yang maintained the top priority is to adjust the pattern of national income distribution, increase consumption and expand the proportion of middle-income people. Many experts put forward a series of measures such as the setting up a CPI-pegged salary growth mechanism, carrying out salary increase policy for public servants by the end of this year, expanding consumption, raising the starting point for levying personal income tax, issuing subsidies to low-income residents and ensuring more social benefits to low-income families. Government should issue a package of measures to stimulate economy and develop capital market in view of the sluggish market.

Additionally, government also needs to take initiative in improving people's livelihood, increasing public expenditure, strengthening social security system, and finding solution to the pressing issues of aging, medical care and unemployment.

With public savings hitting as much as two trillion yuan, experts believe more favorite policies should be issued to encourage consumption. Meanwhile, restriction on service industry, such as tourism, culture, recreation, fitness should be lifted, and auto business encouraged. Additionally, tax on house trading should be lowered, supervision on consumption safety be strengthened and export of commodities be expanded.

Rural demand

The expansion of domestic demand relies heavily on the exploration of rural market.

The countryside is the first place where domestic demand should be expanded. 800 million farmers, which account for two thirds of the total population consume one third of the domestic commodities. According to statistics, urban consumption is four times higher than that of farmers, and farmers' consumption power is the weakest though they have strong desire in consumption. Besides motor bikes, rural consumption on durable consumption goods among per 100 farmers is 50 percent less than the urban level. The per capita cash income in rural areas this years has exceeded urban per capita disposable income. Furthermore, the current global economic downturn did not affect China's rural economy, which shows the development potential and lucrative prospect in rural market.

According to the Third Plenary Session of the 17th CPC Central Committee, farmer's personal income will be doubled by 2020 compared to this year's level. The average net income for farmers was 4140 yuan last year. There is still large room to help farmers increase their income, specifically, to raise rural subsidies and the grain purchase price.

Xie Yang, deputy director of the Agriculture Department under Development and Research centre of the State Council, held the best way to speed up urbanization in rural areas is to raise farmer's income. It is estimated that roughly 1.5 million farmers will move to urban areas if urbanization process progresses by one percent, which will create great opportunities and accelerate rural consumption.

There are many weak links in rural area, which call for more fiscal benefits. The infrastructure and distribution network in rural areas need large amount of investment, and so do the rural education, medication as well as reduction of burdens. In that way, China's economy will not be vitalized until rural consumption is developed.

By People's Daily Online