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Boost domestic consumption for sustainable growth, ADB urges

By Wang Xiaotian ang Lan Lan (China Daily)
Updated: 2010-09-29 10:09

Customers shop for jewelry at a store in Beijing. Investment and domestic consumption are driving China's growth, the ADB says. Nelson Ching / Bloomberg

BEIJING - The Chinese economy will continue to grow vigorously this year and the next, but policymakers will need to boost domestic consumption to make growth more sustainable and inclusive over the long term, the Asian Development Bank (ADB) said on Tuesday.

The Chinese economy is expected to grow 9.6 percent year-on-year this year and 9.1 percent next year. Analysts have regarded China's strong growth as a major driving force of the volatile global economy and positive to the country's international influence in major world organizations such as the World Bank and the International Monetary Fund (IMF).

According to a Reuters report on Tuesday, the IMF members are discussing a proposal whereby China is expected to leap-frog industrial powers Germany, France and Britain to become the international finance body's second or third most-powerful member.

According to the report, the shake-up under discussion by IMF member countries would give many large emerging economies, including Brazil, Russia, India, South Korea and Turkey, more voting power at the fund.

Bigger voting power would give countries like China greater sway over IMF lending decisions and more influence over global economic policy.

The issue of the reforms is set to dominate a meeting of global finance leaders at the IMF and World Bank in Washington on Oct 8 to 9.

China's current voting power does not match its economic weight in the world, said Huang Yiping, economist with the China Center for Economic Research at Peking University.

"The IMF reform should be accelerated; the management of the fund, for example, should be made more diversified, with more from the emerging countries," he said.

In its newly released Asian Development Outlook 2010 Update, the ADB noted that investment and domestic demand have combined to bolster China's strong growth momentum.

"Investment and domestic consumption continue to drive growth while the contribution of net exports turned positive in the second quarter for the first time since the global recession," said Paul Heytens, ADB's country director for China.

On the back of its robust expansion, inflation rate pressure is expected to ease. The bank has trimmed its inflation rate forecast for this year to 3.2 percent from the 3.6 percent prediction in April, while keeping the 2011 prediction unchanged at 3.2 percent, saying consumer price pressures remain relatively subdued.

Despite China's strong economic expansion, the ADB has urged Chinese policymakers to make fiscal policy adjustments and take other measures to encourage private consumption to rebalance the economy and make growth more sustainable.

"Fiscal policy can play an important role in promoting a more consumption-driven and services-oriented economic model, particularly if it is complemented by other mutually supportive and consistent policies," said Lee Jong-wha, ADB's chief economist.

Among measures to encourage consumption are allocating more fiscal resources to raise the disposable incomes of households, strengthen the social security network, increase supply of low-cost housing and boost fiscal transfers from the central government to the provinces.

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"Failure to decisively implement economic rebalancing toward a consumption-driven growth model could jeopardize sustainability in a further generation, particularly given the rapid aging of China's population," said Paul Heytens, ADB's country director for China.

GDP growth for the third quarter of 2010 is seen at about 9 percent, which could dip to 8 percent in the fourth, with export growth likely to decelerate in the second half as a result of the lower base last year, subdued overseas demand, and the expiration of tax rebates, said the report. It added that private consumption is likely to remain brisk, underpinned by growth in employment and incomes.

ADB's forecasts assume that the planned fiscal stimulus programs will be fully disbursed through the second half of this year, and no new stimulus measures will be introduced.

"We expect fiscal stimulus to phase out by year end, and monetary tightening in previous months to adjust money supply and credit would continue to converge toward the government target, minimizing the need for further tightening," said Heytens.