By Cheng Guoqiang, Institute of Market Economy, DRC

Research Report No 43, 2009

In spurring domestic consumption, the greatest potential lies in the rural areas. Exploring rural market and spur rural consumption are not only an important policy measure for China to cope with the international financial crisis and ensure steady economic development, but also a long-term strategic option for the country to promote the change of its mode of economic development and pursue a faster and better economic development. But currently, the prominent problems are that rural consumption is insufficient and rural market is underdeveloped. For this reason, fully tapping the huge potential of rural consumer market is vitally important for ensuring economic growth and spurring domestic consumption. In this respect, effective measures must be taken.

I. Present State of China's Rural Consumption

1. Rural consumption is in a period of rapid growth

The total retail of consumer goods in China's rural areas rose from 923.5 billion yuan in 1994 to 1.98 trillion yuan in 2004. It was a trillion-yuan growth over a span of 10 years. However, the ensuing trillion-yuan growth took only less than four years from 2004 to 2007 to reach a new level of 2.88 trillion yuan. During the 2004~2007 period, the total retail of consumer goods in the rural areas went up on an average annual rate of 13%, which was visibly higher than the 8% posted during the 1994~2004 period. Besides, the Engel coefficient for China's rural residents dropped to 49.1% in 2000 and their per capita net income reached 2,936 yuan in 2004. Related studies indicate that under the present conditions, rural consumption will enter a period of rapid growth after the per capita net income of peasants exceeds 3,000 yuan and the Engel coefficient (namely the ratio of food spending to total family consumption) drops below 50%. Our preliminary judgment is that since 2004, the consumption by China's rural residents has entered a rapid growth period.

2. Rural consumer market has huge potential

The third plenary session of the 17th CPC Central Committee set the goal that by 2020, the per capita net peasant income will double the 2008 level, the level of rural consumption will be much higher and absolute poverty will be basically eliminated. By then, the per capita net peasant income should at least reach 8,280 yuan. If based on the estimate that the consumption inclination of the rural residents in 2007 was 77.8%, rural consumer market is expected to reach 5 trillion yuan in 2020, or 74% larger than its present size. If peasant income increases further in the future, their purchasing power will grow further and their consumption inclination will become further stronger. As a result, the potential of rural consumer market will become even larger.

3. Rural consumption structure undergoes transformation and upgrading

Compared with 2000, the Engel coefficient for rural residents in 2007 dropped from 49.1% to 43.1%. But the ratio of transportation and communications spending to family consumption rose from 5.58% to 10.19% and the ratio of medical care spending rose from 5.24% to 6.52%. This means the rural residents are in a transition from food, residence and other basic subsistence consumption to development and enjoyment consumption. In 2007, the possession of consumer durables by 100 peasant families was 94.4 television sets or up 93.6% over 2000, 45.9 washing machines or up 60.7%, 26.1 refrigerators or up 112.2%, 48.5 motorcycles or up 121.1%, 68.4 fixed phones or up 159.1%, and 77.8 mobile phones or up 18 folds. In recent years, home appliances, mobile phones, computers and other high and middle-end consumer goods have become the hot spots of peasant consumption, suggesting that the consumption of rural residents is moving from the type of having enough food and clothes to the well-off type. The estimates of the National Bureau of Statistics indicate that each-yuan additional consumer spending by the rural population will bring about two-yuan consumer demand for the whole economy and that each percentage point growth in the popularization of any home appliance among rural residents will bring a consumer demand of 238 units. Therefore, once rural consumer market is truly motivated, it can produce profound impacts on economic growth.

4. Environment for rural consumption and market circulation improves gradually

Since China launched the "Rural Market Project" in 2005, a total of 2,300 enterprises have established their rural circulation networks in 80% counties. At present, China has 300,000 rural chain stores and 367 rural commodity distribution centers, which cover 80% counties and one-third administrative villages. These have made peasant shopping safer, easier and more economical. As the modern forms of circulation such chain stores and distribution centers and the commercial forms of supermarkets, convenience stores and demonstration stores move from the urban to the rural areas, the peasants in many places have bid farewell to their traditional mode of consumption that they had to go to individual vendors for daily necessities, rural fairs for household needs and urban areas for major commodities. The environment for rural consumption has been further improved. From this year on, the state will offer fiscal subsidies to the nationwide "Home Appliances for Countryside" program. Preliminary estimates indicate that this measure can spur consumption by 920 billion yuan. It not only can effectively explore rural market and ease the difficulties of the home appliance and related industries，but also can help improve the production and living conditions of the peasants and establish and improve a rural modern circulation system.

II. Main Difficulties in Spurring Rural Consumption

However, China still faces many difficulties and challenges when it tries to convert the huge potential of rural consumer market into real domestic demand. The insufficient rural consumption and the lagging development of rural market have become a profound contradiction and a fundamental problem in China's economic development. The main expressions are as follows:

1. Slow peasant income growth and low purchasing power

This is a fundamental constraint to insufficient rural consumption and low consumption level. In the early years of reform and opening up, rural consumption was once the main pillar of economic growth. In 1978, for example, the total rural retail of consumer goods was 105.3 billion yuan or 77.6% of the country's total, while the urban retail was only 50.5 billion yuan or 32.4% of the national total. As the Chinese economy developed swiftly, the scale of urban consumer market expanded rapidly. In 1995, the total urban retail of consumer goods surpassed the rural retail, with the former being 1.2 times higher than the latter. In 2007, this gap widened to 2.1 folds. The rural population, which accounted for two-thirds of the national total, occupied only one-third of the total national retail of consumer goods. There have been diverse reasons for the slow growth of rural consumption. For example, rapid urbanization has led to a reduction in rural population and an increase in urban migrant workers and has shifted their consumption from rural market to urban one. But the fundamental problems are the slow growth of peasant income and the low purchasing power of peasants. During the 2000~2007 period, the average annual growth rate of the disposable income of China's urban residents was 10.1%, while the average annual growth rate of the net income of its peasants was only 6.2%. The urban-rural income ratio was narrowed from 2.56:1 in 1978 to 1.86:1 in 1985, but was widened to 2.79:1 in 2000 and further to 3.33:1 in 2007. In the meantime, regional disparities in rural consumption have also become more and more conspicuous. For example, the daily consumer spending of rural families in the east region is 1.73 times as much as in the west region and 1.48 times as much as in the central region. In the long run, it will become increasingly difficult to narrow the income gaps between the urban and rural regions and between different regions as a result of the development of China's industrialization and urbanization. These income gaps will continue to widen and become more serious.

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