Releasing growth potential

Development and opening-up must be well coordinated to boost domestic demand and adjust the economic structure

Economic transformation and structural readjustment have become the international trend as the world enters a period of great changes and great adjustments. Since the Chinese economy is closely integrated into the world economy it is necessary to constantly improve the development level of our country's open economy when we advance modernization under the background of economic globalization, regional economic integration and trade liberalization. While taking into full consideration both domestic and international conditions, we should accelerate the change of the growth pattern and economic restructuring through opening our economy wider.

The most important part of economic restructuring is to boost domestic demand, a strategic base underpinning our country's social and economic development.

First, boosting domestic demand is the fundamental measure to effectively deal with the international financial crisis. In the past two years, we have achieved remarkable economic recovery mainly by expanding domestic demand in spite of the shock of the international crisis. Currently, the international financial crisis continues to have a deep impact on the world economy and China's export growth is slowing as a result of the European sovereign debt crisis and other issues. It is predicted that the growth of international trade will remain sluggish in 2012. Under such circumstances, to maintain stable and relatively rapid economic growth, it is more urgent than ever to allow domestic demand to play a bigger role in propelling economic growth.

Second, boosting domestic demand is both a basic requirement of and the top priority for accelerating transformation of the economic development pattern. After more than three decades of reform and opening-up, China has become the world's largest exporter with a trade-to-GDP ratio higher than many other countries. As trade protectionism increases around the world, efforts to expand exports will encounter more and more trade frictions, barriers and obstacles while international competition will become increasingly fierce. International experience shows that no matter if it is a developed country or a developing one, a large economy can develop by depending mainly on domestic demand. Therefore, our sustained development must be based on boosting domestic demand.

Third, boosting domestic demand is the only way to maintain China's stable and relatively fast economic growth in the long run. As the world's largest developing country with a huge population and a vast territory, China's development is entering into a period of important strategic opportunities with an enormous market, ample room for maneuver and huge potential domestic demand, all of which can contribute to lasting economic development. Hence, the strategy of boosting domestic demand must be firmly implemented to ensure sustained development.

Urbanization has the greatest potential for boosting domestic demand while coordinating balanced development between urban and rural ranks. It is a key source of growth for domestic demand. It is a historic change that China's urban population exceeded 50 percent of its total population in 2011. Yet, as a whole, China's urbanization still lags behind not only that of developed countries but also the world average. Related statistics show that developed countries usually have an urbanization rate of 80 percent, while developing countries with similar per capita income as ours boast an urbanization rate of more than 60 percent. China is undergoing a development period of rapid urbanization that will not only help expand investment but also promote consumption to considerably stimulate domestic demand. International economists once predicted that China's urbanization and the United States' high technology would serve as the "two key growth engines" for the world economy in the 21st century. Related statistics show that the ratio of urban consumption to rural consumption was 3.6:1 in 2010 with the annual consumption of urban and rural residents standing at 15,900 yuan ($2,525) and 4,455 yuan respectively. According to this, it is estimated that the transformation of a rural resident into an urban one will increase consumption by more than 10,000 yuan. And an increase of the urbanization rate by one percentage point a year will absorb more than 10 million rural residents into the cities, thus increasing consumption by over 100 billion yuan and creating far more related investment opportunities. At present, the number of farmers-turned-migrant-workers in China totals 240 million among whom 150 million have left their country homes to seek jobs. Since there are still plenty of laborers in rural areas, the country's urbanization still has a great potential for boosting domestic demand. Even before the urban-rural gap is fundamentally narrowed, a new wealth-gap between the urban rich and the urban poor is looming. Addressing the dual gaps will facilitate balanced urban and rural development, reduce social conflicts and bring into full play the role of urbanization in boosting domestic demand.

Urbanization should be advanced stably on the basis of fully respecting the will of farmers, firmly safeguarding farmers' rights and strictly protecting arable lands. The government should draw up mid- to long-term plans on urbanization development and comprehensive policy measures. Urban planning and administration should be strengthened to guide the population flow and industrial transfer and to ensure reasonable distribution and complementary development of towns and cities of all sizes. Policy measures should be urgently formulated and orderly carried out to absorb farmers-turned-migrant-workers into cities. Migrant workers should not only be included in, but also gradually guaranteed equal access to basic urban public services like social security, healthcare, education and culture. And the government should help solve their practical problems regarding employment, housing, healthcare and education for their children. Requirements should be relaxed to orderly transfer farmer-turned-migrant-workers with stable jobs and housing into permanent urban residents in mid-sized and small cities. It should also be noted that the healthy development of the real estate market is essential to the progress of China's urbanization course. We should continue the tightening measures over the property market and cement the early fruits of macro control. We should press ahead with the construction of government-subsidized affordable housing while effectively increasing the supply of ordinary commercial housing, and accelerate the establishment of a long-term mechanism to ensure stable and healthy development of the real estate market to steadily advance urbanization.

Facilitating coordinated regional development is another source of domestic demand growth. The country should further implement the overall strategy of regional development and the strategy of main functional regions. While promoting economic upgrading in eastern areas, the country should better support the development of western areas, revitalize the old industrial bases in Northeast China and the rise of central areas, and particularly enhance support for the old revolutionary bases, areas inhabited by ethnic groups and border regions. Regional development is closely related to urbanization. One key aspect of the backwardness of underdeveloped areas is their inadequate progress in urbanization. Therefore, in areas where development conditions are mature and environmental capacity robust enough, urbanization should be actively and steadily advanced to foster new growth points and to enhance the local strength of self-sustained development. Instead of adopting blanket regional, industrial and land policies the government should adjust them in line with different local situations. Under the conditions of strict energy conservation and environmental protection, high quality and safety guarantees, and scientific location, some national key development zones in the western areas should enjoy differential policies when developing industries of peculiar local advantages.

The service sector boasts the greatest industrial potential in boosting domestic demand. After many years of hard work, China has risen to be a leading manufacturing power, ranking among the top producers for a lot of industrial output. "Made in China" can continue to grow in the future as its international competitive edge is increasingly sharpened. Comparatively speaking, the less-developed service sector has become a "weak point" of China's social and economic development. According to related statistics, the service sector accounted for only 43.1 percent of China's gross domestic product in 2010, not only far below the average level of about 70 percent in developed countries, but also lower than the average level of about 53 percent in mid-income countries. The service sector, most of which belongs to the real economy, can create social wealth and enhance our overall national strength. The service sector is also the largest job creator and an important driving force behind scientific and technological innovation. Industrialization requires industrial growth as well development of the service sector because integrated industrial and service development will help improve the quality and competitiveness of industrial development. China's 12th Five-Year Plan (2011-2015) has aimed to raise the ratio of the service sector in the national economy by 4 percentage points in five years. We should work hard to realize the development goal for the service sector.

Expediting development of the service sector is a key task of industrial structural readjustment. The government should take effective measures to create favorable development conditions for the service sector to expand in size and upgrade in service. China should both accelerate development of producer service industries such as modern logistics, e-commerce, scientific research and design and aggressively promote development of consumer service industries like tourism, fitness, care of the aged and domestic services by supporting the development of small and mid-sized service companies. Meanwhile, the country should actively promote development of new industries of strategic importance, high-tech industries and advanced manufacturing industries to tap into the domestic demand and speed industrial upgrading.

It is noteworthy that during the course of industrialization and modernization, it is necessary to advance agricultural modernization simultaneously. A good job on the works concerning rural villagers, countryside construction and agricultural production is critical to both the task of stabilizing growth and taming inflation, as well as government efforts to boost domestic demand and adjust the economic structure and advance urbanization. Hence, the government should further tilt policies to empower and enrich farmers, expedite agriculture-related scientific and technological innovation, enhance construction of rural infrastructure in order to advance construction of the new countryside. Besides, the government should strictly protect arable land to ensure there is enough land for growing grain, focus on improving the comprehensive productivity of the main agricultural products to safeguard food security and promote stable agricultural development, and continuously increase farmers' incomes and the overall development of rural areas.

Consumer demand is the final demand. It is necessary to attach more significance to expanding consumption, especially residents' consumption, during the country's efforts to boost domestic demand, either due to the practical needs of dealing with the current challenges or from the long-term perspective of the ultimate goal of development. For a long time, China has mainly depended on investment for growth. According to related statistics, the country's consumption to GDP ratio was 47.4 percent in 2010, not only far below the 87.8 percent of the United States, 80.7 percent of the European Union, and 78.6 percent of Japan, but also considerably lower than the average level of about 67 percent in mid-income countries. China has a huge consumption potential that is yet to be fully realized. The situation that the country has ample levers to increase investment but is short of measures to shore up consumption must be changed. China needs to perfect fiscal, tax and credit incentives to encourage reasonable resident consumption, and should focus on improving the consumption environment and fostering new consumption growth points, and, in particular, enhance resident's consumption power. To this end, the government should deepen the institutional reform of income distribution to ensure synchronized growth between residents' incomes and the national economy as well as that between labor income and productivity, raise low-income families' incomes through multiple channels and increase the proportion of mid-income families. During the course of primary distribution, the public should be encouraged to seek jobs and create jobs while labor income should be fairly increased. Meanwhile, the role of redistribution should also be brought into full play to relieve job-seekers and job-creators of family worries by perfecting social security systems like pension, healthcare and unemployment, promoting equal access to basic public services and establishing a social welfare safety network.

While boosting consumption plays a basic role in maintaining stable and relatively fast economic growth, stabilizing investment is the key to driving growth directly. China's experience of dealing with the international financial crisis has demonstrated that appropriate investment can quickly, effectively and directly boost economic growth. In 2012, the central government's budgetary investment will focus on meeting the capital needs of projects under construction to avoid uncompleted projects and ensure the orderly construction of key projects included in the country's 12th Five-Year Plan.

Domestic development and opening-up must be well coordinated to boost domestic demand and adjust the economic structure. In the face of sluggish external demand, China should maintain the continuity and basic stability of foreign trade policies to maintain stable export growth, upgrade its export mix and explore new markets. Meanwhile, the country should increase imports as a strategic measure to raise the level of our overall economic development, especially imports of advanced technological equipment, key components and important energy and raw materials.

The author is vice-premier of China. This is an excerpt from his article published on the latest issue of Qiushi magazine.

(China Daily 02/20/2012 page8)