Ways to keep economy vibrant

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By Hu Shaowei (China Daily)
Updated: 2009-10-20 10:05

The global financial crisis that originated in the United States has not only dealt a heavy blow to the world economy but also had enormous impact on China's economic development, making the world's third largest economy feel more urgent to change its long-established growth model.

To regain its past fast-growing momentum, there is extensive consensus within China on expanding the slackened domestic demand, and domestic consumption in particular, as a tool to expedite the lagging pace of economic development. Hence, the expansion of domestic demand has become a priority area for government stimulus packages. However, how to boost domestic consumption, especially household consumption, still remains a headache the Chinese government is yet to address.

In fact, China's final consumption expenditure growth rate has not been at a low level in the past decades. It has been faster than the majority of other world economies. From 1991 to last year, the country's annual consumption growth rate in this regard was 15 percent and 9.5 percent in nominal and real terms respectively. Household consumption has also maintained robust momentum during the same period, which stood at 14.5 percent and 9.04 percent year on year respectively in nominal and real terms. Nevertheless, the prospect of China's individual consumption remains far from upbeat, given that the country's household deposit growth has not kept pace with that of its total deposit. The ratio of enterprise and government savings to the country's gross domestic product (GDP) nearly doubled from 1992 to 2007, from 11.3 percent to 22.9 percent and 4.4 percent to 8.1 percent respectively. During the period, the country's household savings to its GDP remained almost at a standstill. The high household savings have been mainly contributed by the medium- and high-income families, with their contribution to deposit being 70 percent both in urban and rural areas. Accounting for 18 percent of the country's total population, middle- and high-income urban residents have contributed about 50 percent to the country's total domestic deposit.

Despite their accounting for the lion's share of the country's deposit, urban residents have not witnessed a tangible growth of their savings in the past years. The reason is that their non-consumption spending, which consists of spending on housing and social security, has grown faster than spending on consumer goods because of the skyrocketing home prices in recent years.

In view of these circumstances, a short-term as well as a mid- and long-term policy program should be drafted respectively, aiming at reactivating depressed domestic demand to develop consumption into a more important economic growth locomotive than investment.

To promote a sustainable economic development, China should try to push for the transformation of its investment and export-dependent economic model. The country's ever-growing deposit in the past decades has been its passive option under its investment-fueled economic growth model.

The country should also try to improve its imperfect social security system and increase its public financial spending. An improved social security system and increased investment by the government in education, medical care and housing mean that the government will undertake part of individual saving functions, which will effectively reduce people's savings and encourage them to spend more.

Also, increasing people's income is an effective method for expanding private consumption. The government should reduce the role of GDP growth in assessing performance of local officials. Instead, employment and environmental protection should be taken as overwhelming standards to measure their merits.

In addition, the country should properly handle the link between the housing market and economic growth.

Due to skyrocketing prices in recent years, urban residents have to spend an ever-increasing portion of their limited income on housing. As a result, their consumption of other items has been seriously affected and household consumption's contribution to economic growth has been declining. To really stimulate consumption growth, the country should make necessary adjustments to the current market-dominated housing industry.

Besides, to boost domestic consumption, the country should also try to narrow the ever-widening income gap. The high income of employees in some monopoly industries should be effectively regulated and their income should be tailored according to their contribution to the society. Also, the country's financial spending should not only cover booming urban and eastern areas.

A fair and equitable market competition environment is desperately needed to reduce the role of non-market factors, such as social relations, politics and family backgrounds, in the market competition. In particular, labor market barriers, which have been firmly erected between urban and rural areas and different sectors, should be broken up.

The author is a senior economist with the State Information Center.

(China Daily 10/20/2009 page8)