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Consumption seen as new driver of growth
By Jiao Xiaoyang (China Daily)
Updated: 2006-03-16 05:41
After more than 25 years of economic growth driven by exports and fixed-asset
investment, China is turning towards consumption to sustain the boom.
Fostering domestic spending and reducing the heavy reliance on exports and
investment has been placed on top of the government agenda this year.
Retail sales in 2005 reached US$827 billion, up 12.9 per cent from 2004,
official data shows the biggest growth since 1997.
This year, retail sales are forecast to rise 12.5 per cent in the first half,
according to a Ministry of Commerce survey released last month.
"GDP growth in the past was spectacular but is not sustainable if consumption
keeps dormant and is not enough to absorb the increased production," said Lin
Yueqin, an economics researcher with the Chinese Academy of Social Sciences.
"In particular, relying too much on investment and trade wastes resources and
creates trade rifts," he said.
China's foreign trade increased 23.2 per cent last year to US$1.42 trillion,
generating a record US$101.9-billion surplus.
But at the same time, low-priced Chinese exports became the world's top
target of anti-dumping charges and other restrictive trade measures.
China also consumed about 50 per cent of the world's cement and 40 per cent
of steel amid an infrastructure-building and real-estate boom. Fixed-asset
investment jumped 25.7 per cent in 2005, largely unchanged from the 25.8 per
cent growth in 2004.
"Given high international oil prices and a possible slowdown in the global
economy as well the government's effort to rein in investment, domestic
consumption will play a bigger role in the economy," said Lin.
"Noticeably, the government has moved to shift the economy to a more
consumption-oriented path and the current climate is favourable to the pickup of
consumption," he said.
The government announced a series of policies last year to raise private
income, including scrapping agriculture tax, raising thresholds on income tax,
increasing minimum wages and civil servants' salaries, and providing free basic
education in rural areas.
Urban residents' per capita disposable income was up 9.6 per cent to 10,493
yuan (US$1,295) last year, according to the National Bureau of Statistics (NBS).
Rural residents' net income per capita improved 6.2 per cent to 3,255 yuan
(US$402) over the same period.
The government has announced that it would further encourage private spending
this year, especially by farmers. It also promised to foster new consumption
themes and improve market regulation.
The retail market seems to be in line with the government's intentions.
According to a recent Ministry of Commerce survey of 600 categories of consumer
goods, 170 are forecast to have balanced supply and demand in the first half of
this year, whereas the remaining 430, or 72 per cent, will see overcapacity.
Nothing will be in short supply.
"Reasonable overcapacity is helpful to stimulate price competition, promote
upgrading of products and therefore encourage spending," said Qi Jingmei, a
senior economist with the State Information Centre.
Prices of most retail goods would remain stable in the first half of 2006,
but food items and jewellery would probably register rises, according to the
survey.
It noted a trend of moderate price drops in major consumer goods such as
electrical appliances and automobiles, saying this would prod consumers to look
for higher-end products.
Despite an obvious downward pressure on retail prices, it is the consensus of
economists that deflation is not imminent.
"The economy is still on a fast track, the demand for production materials is
robust, and oil prices remain high, which will combine to offset flat retail
prices," said Qi.
She said the consumer price index (CPI) is likely to rise moderately amid
stable GDP growth.
A recent report by the Chinese Academy of Sciences projected a similar
outlook, saying China's CPI would rise 1.97 per cent this year, compared to 1.8
per cent in 2005 and 3.9 per cent in 2004.
Assistant Minister of Commerce Huang Hai predicted last month that China's
retail sales would top 10 trillion yuan (US$1.2 trillion) in 2010 with an
average annual growth of 11 per cent from now.
But making consumption as powerful an engine of growth as investment and
exports may not be easy. There are doubts whether the potential purchasing power
in China ?represented by over 14 trillion yuan (US$1.7 trillion) in bank
deposits ?can be fully tapped in the short term.
"The current 12-per-cent retail-sales growth is not slow, but further
acceleration may prove to be difficult because there are no new consumption
themes to inspire buyers to go out and spend,?said Tao Dong, chief regional
economist at Credit Suisse.
Cui Jianhua, vice dean of Peking University's School of Economics, said the
potential demand would not transfer into real spending until private incomes
grow further and the social security network is improved.
China had more than 100 million people living in poverty at the end of 2004
and average per capita income ranked 129th in the world at about US$1,500,
behind Egypt and Iran, according to official statistics.
"The costs of education, health care and pensions add to citizens?feelings of
uncertainty and make many tighten their purse strings for rainy days,?said Cui.
The government is taking steps to improve the welfare system and,
particularly, the livelihood of the 750 million rural residents who are seen as
the mainstay in expanding domestic demand.
"It takes time before the people get better off and the welfare
infrastructure is in place,?said Lin of CASS.
"It's not difficult to have a big consumption volume considering the number
of people we have,?he said. "But to transfer the economy into a
consumption-oriented one would need more time and efforts.?
(China Daily 03/16/2006 page1)
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