Rural Markets Are Key to Expanding Domestic Demand

From: English Edition of Qiushi Journal Updated: 2011-09-20 11:53
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 The foundation for a steady recovery of the Chinese economy is still not firm, so we must strengthen the leading role of domestic demand in stimulating economic growth. Therefore, actively working to expand demand in the rural market is an important and pressing task if we are to achieve stable economic growth mainly driven by domestic demand.

 I. Severe Challenges Facing Development of the Rural Market

 China has more than 200 million rural households consisting of nearly 800 million individuals, so the rural market is vast with a huge potential for increasing consumer spending. We need to speed up development of the rural market, however, as an important part of the effort to turn the potential demand in the countryside into actual purchasing power.

 There are major problems with the distribution of commodities in the rural market. A new pattern is gradually taking shape as a result of the development of the market economy. Different economic sectors and market competitors are developing at the same time. Self-employed workers and business people, brokers for agricultural products, rural cooperatives and distribution enterprises are entering the rural distribution market at a fast rate, all playing a positive role in stimulating the distribution of agricultural products. Some problems have also emerged in distribution in connection with the diversification of distribution modes, mainly because some distributors are not large enough to have good economy of scale, are too weak and have poor operating practices.

  Two senior citizens doing their shopping at the “supply and sales supermarket” in Kongjiahu Village, Tongjing Town, Yinan County in Shandong Province. Many of the villages in this county have “supply and sales supermarkets,” which are greatly appreciated by the local residents. / Photo by Du Yubao, supplied by Xinhua

 Distribution costs are high in rural areas. One major reason distribution costs in the countryside are high is because poor transportation conditions make the transport of commodities expensive. In addition, residents do not usually live in large compact communities so the market in any one area tends to be small, making it difficult for retailers to buy in bulk and raising the cost of doing business and prices to the end consumer. Costs also tend to be high because the turnover rate for commodities tends to be low, making it easy to overstock, which increases overhead. Finally, daily necessities are usually sold by small shops and mom-and-pop stores instead of more modern outlets such as supermarkets and chain stores. These factors are responsible for the high cost of distribution and low profit rate in rural markets, which makes them less attractive to venture capitalists.

 There is insufficient effective supply in rural markets. Consumer spending tends to be in the low range for a large proportion of rural residents, who mainly buy inexpensive long-lasting items. On the other hand, there have been fundamental changes in the spending habits of residents of more prosperous areas thanks to a dramatic increase in their incomes. But some enterprises have a poor understanding of the rural market, don’t fully take into consideration the spending habits of rural residents and ignore differences between different rural regions, resulting in the failure of their products to meet consumer demand in the countryside.

 The gap between the size of the urban and rural markets is widening. China’s rural market is expanding along with the increasing rural incomes. The volume of retail sales of consumer goods in the rural market reached 3.4753 trillion yuan in 2008, 33 times the volume of 1978. In spite of this expansion, it is also apparent that the rural market is growing more slowly than the urban market. Retail sales of consumer goods in the rural market accounted for 67.6% of the total retail sales volume of consumer goods in 1978, but shrank to 32% in 2008. Two-thirds of China’s population lives in the countryside, but the rural population accounts for less than one-third of total consumer spending.

 Thanks to policies designed to expand domestic demand such as the Home Appliance Subsidy Program for Rural Areas and Automobile Subsidy Program for Rural Areas, the volume of retail sales of consumer goods at the county level and below has grown by 16.4%, 2 percentage points higher than the growth in volume above the county level. This is a temporary reversal of the situation of many years in which growth in consumer spending in the countryside has lagged behind that in urban areas, but maintaining this reversal will require overcoming huge challenges posed by the international financial crisis.

 II. Unique Advantages of Supply and Marketing Cooperatives (SMCs) in Expanding the Rural Market

 There is a natural connection between SMCs on one side and agriculture, farmers and rural areas on the other. The ability of SMCs to serve agriculture, rural areas and farmers has been increasing in recent years. There are now 36,000 specialized cooperatives, 20,000 trade associations, 199,000 village-level centers offering general services, over 1,800 wholesale farm produce markets, and 49,770 corporations of various types in the national SMC system. These organizations, which handle both production and distribution, deliver manufactured goods to the countryside and agricultural products to the city, thereby bridging urban and rural areas and benefitting both.

 The SMC system has organizational advantages. In the long term, raising rural incomes will require tapping the inherent potential of agriculture, and making innovations in organizational and operational forms in agriculture, and raising the organizational level of farmers will provide the breakpoint in this effort. A total of 168 standard demonstration bases and 6.16 million mu of standard production bases had been set up as of the end of 2008 in the SMC system. The specialized cooperatives in the SMC system cover cultivation, animal husbandry, processing and marketing. The SMC system now has 8.47 million rural households. Thanks to the assistance of this system, these households earned over 40 billion yuan in 2008, which increased their average per capita income by nearly 5,000 yuan. In addition, SMCs have set up more than 20,000 trade associations with a total membership of 2.619 million, which focus on major traditional business activities and leading industries. These associations have developed rapidly and form an effective bridge between markets and farmers.

 An effective rural distribution network greatly benefits the countryside. The All-China Federation of Supply and Marketing Cooperatives (ACFSMC) has been actively working since the dawn of the new century to expand modern business operations in agriculture and promote the development of a modern rural distribution network. As of the end of 2008, there were 4,500 chain stores and distribution businesses for agricultural machinery and supplies and consumer goods in the system, as well as 650,000 commercial and service operations, including supermarkets, centers providing general services and recycling stations or points for renewable resources. In addition, new commercial and service operations dealing in medicine, books, home appliances and farm machinery are experiencing thriving development. SMCs are actively working to strengthen their ability to distribute goods in both directions, bringing agricultural products to urban supermarkets and community green grocers and bringing agricultural machinery and supplies and daily necessities to rural markets.

 SMCs play an important role in providing needed services. Demand for services of all types is increasing in the countryside as the living standards of rural residents rise. SMCs across the country are working to meet this increased demand by constantly improving their network of services for rural residents to include a wide range of services needed in agricultural production and daily life. SMCs have become the main proponents in the effort to improve the network of services of all types in the countryside. Local centers providing goods and services have been working to continuously expand the number and types of services they offer and improve their service functions to gradually develop a comprehensive service platform so that they will be able to offer whatever products or services local residents require. This not only greatly improves the working and living conditions of local residents but promotes greater consumer spending in rural areas as well.

 III. Measures for Developing the Rural Market

 The biggest potential for expanding domestic demand is in the rural areas of the country. According to the National Bureau of Statistics of China, a 1-yuan rise in per capita consumer spending in the countryside will create a 2-yuan increase in per capita consumer demand for the country as a whole. This indicates that tapping the potential in rural consumer spending will greatly contribute to increasing overall domestic demand and be a long-term driving force for China’s economic growth. SMCs should take advantage of their strengths to develop growth areas in rural consumer spending and take the main responsibility for developing rural markets.

 SMCs must work hard to develop agriculture and increase rural incomes. They should take advantage of their network, facilities and personnel and rely on local leading industries, industries that take advantage of local resources and enterprises that make competitive products to guide and organize farmers to set up specialized cooperatives. SMCs should actively develop information, marketing, technical, and agricultural processing and storage services and assist specialized cooperatives to develop large scale cultivation, standardize production and develop brand names in order to help local farmers increase their incomes. SMCs should accelerate the development of leading enterprises that handle agricultural products from processing through distribution, promote the development of industrial bases that take advantage of local resources, improve the chain of agriculture-based industries and develop an efficient and barrier-free marketing and sales network for agriculture products to help alleviate the difficulties farmers face in selling their products. Various types of agriculture-related trade associations should be established to provide farmers with professional information, purchasing and marketing, and training services, as well as to promote new products, techniques and standards.

 SMCs need to accelerate efforts to develop the rural distribution network. They should continue working on the project to set up a modern distribution network for the countryside, accelerate development of the network of chain stores dealing in agricultural machinery and supplies, non-durable consumer goods, agricultural products and renewable resources and make good use of the role of SMCs in leading the development of a modern rural distribution system. SMCs should develop a distribution network that covers counties, townships and villages. To accomplish this, they should establish large department stores and a chain of convenience stores and supermarkets in counties and urban areas, establish a chain of owner-operated supermarkets or chain of franchised supermarkets that distribute as well as sell goods in towns and townships, and renovate existing or establish new convenience stores, sales centers for agricultural machinery and supplies and centers offering general services in villages. SMCs should continue working to better coordinate with efforts of the government to improve market conditions in all villages and townships by strongly supporting the efforts of large distribution enterprises to expand their business network to include more localities under the county level.

 SMCs should work harder to develop the rural market for non-durable consumer goods. Two-thirds of all retail sales of consumer goods in the SMC system now occur in rural areas at or below the county level. Members of the SMC system need to obtain a good grasp of the characteristics of the rural market so they can guide manufacturing enterprises in the development of products in line with the needs of rural consumers and meet the demands of different levels of rural consumers. They should make good use of their existing distribution channels and general service functions in counties, townships and villages to expand the market for home appliances, drugs, automobiles, building materials and telecommunication devices in addition to dealing in traditional items such as food and daily necessities to expand their market share. At the same time, the system of services should be improved by including a wider range of services to promote more consumer spending in the countryside by offering high-quality services.

 SMCs should continue to serve as the main distribution channel for agricultural machinery and supplies. Although different types of organizations have entered the market in agricultural machinery and supplies in recent years, SMCs will always serve as their main distribution channel. SMCs at all levels should establish more chain stores dealing in agricultural machinery and supplies and build more modern distribution facilities to lower distribution costs and help alleviate the burden on farmers while also maintaining stability in market supply. The goal for 2010 is for SMCs to set up 2,000 distribution centers for agricultural machinery and supplies under unified management, with standardized business practices and offering a full range of services, 30,000 central pilot stores and 300,000 franchised stores, and for these outlets to handle 85% of all sales of agricultural machinery and supplies in the system. In addition, SMCs are working to develop a sound system of services related to agricultural machinery and supplies by guiding and encouraging distribution enterprises to closely integrate sales and service, provide a full range of services including distribution, processing and purchasing, and provide farmers with pre-production, production and post-production technical services.

 SMCs are promoting the development of large enterprise groups. There are now 57 enterprises in the system with sales volume exceeding 1 billion. SMCs are carrying out a reform of the system of property rights for enterprises in the system to make them into enterprises with a modern corporate structure and promoting adjustment and restructuring of enterprises to develop more leading enterprises. They are working to develop as soon as possible a number of large distribution enterprise groups with a competitive edge by experimenting with new ways of linking industries such as combining enterprises with different types of operation, processing and distribution that serve the same industry and supporting the annexation and reorganization of enterprises across regional boundaries. SMCs are encouraging their distribution enterprises to accelerate efforts to establish their own brand names and supporting their efforts to adopt modern distribution methods such as chain store operations and e-commerce to improve performance through management according to unified standards, bulk and centralized purchasing and prompt delivery of goods. This will lower operation overhead for enterprises and benefit farmers through lower retail prices, which will in turn lead to increased consumer spending.

(From Qiushi in Chinese No. 21, 2009)

Note: Author: Secretary of the Leading Party Group and President of the Board of Directors, All China Federation of Supply and Marketing Cooperatives

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