Fully Unlocking the Huge Potential of China’s Domestic Demand

From: English Edition of Qiushi Journal Updated: 2011-09-20 11:03
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 In order to adhere to the strategy of boosting domestic demand, particularly consumer demand, we must unlock China’s huge potential domestic demand, strive to clear the institutional and structural obstacles that are constraining the growth of domestic demand, and accelerate the creation of a new phase of economic growth underpinned by a rational balance of consumer spending, investment and exports.

 I. Boosting domestic demand represents both a key foundation and a long-term strategy for the growth of China’s economy 

 Boosting domestic demand, particularly consumer demand, is an inevitable choice for China to make use of its favorable conditions to ensure the growth of its economy. Domestic demand has always been the main driving force behind China’s economic growth. Domestic demand accounted for more than 90% of China’s total demand during the period spanning from 1978 to 2009. Moreover, domestic demand was attributable to more than 80% of economic growth for 25 of these 32 years. Being the largest developing country in the world with a population of 1.3 billion, low per capita consumer spending, imbalanced urban and rural development, and widespread regional disparities constitute its fundamental national conditions. This means that there are huge prospective markets and enormous potential for the increase of domestic demand. Moreover, China’s diverse demand structure and the sheer scale of its demand are conducive to the development of industry and improvement of the industrial structure, which in turn leads to mutual promotion and sound interactions between consumer spending and investment demand, thereby promoting constant growth in domestic demand. For a considerable length of time to come, China’s rapid industrialization and urbanization will provide the conditions for domestic demand to play a broader role in economic growth.


  A young girl chooses a festive lantern. Soaring tourist spending gave Nanjing’s holiday economy a major boost during the 2011 Spring Festival holiday period. According to the Nanjing Holiday Affairs Office, an estimated 2.88 million tourists visited Nanjing during the 7-day holiday, representing an increase of 20.5% over the year before. Moreover, the city’s total revenue from tourism totaled at 2.52 billion yuan, increasing by 21.6% over 2010. / Photo by Xinhua 

  Boosting domestic demand, particularly consumer demand, is a fundamental means for realizing a balanced development of China’s economy. During the period from 2005 to 2009, China’s net exports accounted for 5.5%, 7.5%, 8.8%, 7.7% and 3.9% of the country’s GDP respectively. During the same period, the share of investment in the GDP rose from 41.6% to 47.5%, while the proportion of consumer spending dropped from 52.9% to 48.6%. There are serious imbalances in the relationships between domestic and external demand and between investment and consumer spending, and the crux of the problem lies in the insufficiency of consumer demand. This imbalance leads to two consequences. The first is an over-reliance on capital formation as a stimulus for economic growth. Redundant and blind investments go un-checked as the surplus in production capacity becomes increasingly serious, which can easily lead to instability in the economy. The second consequence is an increased tendency for the economy to become reliant on external demand. This has kept China at the bottom of the international division of labor for a long time and has intensified energy, resource and environmental constraints in the country. Therefore, this pattern of development is unsustainable. We must embark on a path towards balanced development and base the growth of our economy on the growth of domestic demand. The key to increasing domestic demand is to boost consumer demand. Only by truly establishing consumer demand as the foundation of our economic development can we give China’s economy sustained impetus for growth and achieve both quality and speed in economic development. 

 Boosting domestic demand, particularly consumer demand, is an urgent step that China must take to enhance its ability to withstand international economic risks. With the deepening globalization of the world economy, the economies of different countries are becoming increasingly intertwined with one another. For China, this is something that presents new opportunities as well as new challenges and risks. For a period of time to come, the world economy is likely to undergo a period of slow recovery, low growth and structural transformation, in which the instability of external demand will increase and international competition will become more intense. Objectively speaking, this situation is putting pressure on China to transform its pattern of development and adjust the relationships between domestic demand and external demand and between investment and consumer spending. At the same time, various forms of protectionism are becoming increasingly prominent, and the impact that this will have on China’s economic growth cannot be overlooked. Whilst actively engaging in economic globalization, it is important that we base our development on domestic demand and expand domestic markets, as this is the only way that we can effectively protect ourselves against unfavorable changes in the external environment, ward off and disperse risks emerging from external impacts and enhance the security and stability of China’s economy.

 Boosting domestic demand, particularly consumer demand, is an inherent requirement for the promotion of balanced economic and social development. The fundamental purpose of economic and social development is to satisfy the ever increasing material and cultural demands of the people. In order to boost domestic demand, particularly consumer demand, we must adjust the way that income is distributed, raise incomes of residents, narrow the gap in income distribution, improve our social security system and develop social programs to boost the spending power of residents and increase consumer expectations. These measures fall in line with the fundamental requirements for safeguarding and improving the livelihood of the people and allowing all of the people to benefit from the achievements of China’s reform and development. The strategy to boost domestic demand allows us to effectively link the development of the economy with our initiatives to safeguard and improve the livelihood of the people, wherein, the all-round development of the people is promoted as the growth of the economy is stimulated. Therefore, boosting domestic demand is a powerful force that can drive forward the balanced development of the economy and society. 

 II. The focus of effort in expanding domestic demand

 The focus of our efforts should be placed on establishing a long-acting mechanism to boost consumer demand, adjusting and optimizing the investment structure, removing institutional and structural obstacles that are constraining the growth of domestic demand, and fully unlocking the huge potential of China’s domestic demand.

 One, we need to actively and steadily promote urbanization to provide new space for the growth of domestic demand. At the present stage, we must adhere to the path of urbanization with Chinese characteristics in actively and steadily promoting urbanization. First, we must improve the layout and the form of our cities. In line with the principles of overall planning, rational distribution, improved functions, and having the large lead the small, we will abide by the objective laws of urban development and develop city clusters in which small and medium-sized cities are the focus of development and large cities act as a foundation. Large cities exert their influence over the development of small and medium-scale cities, thereby promoting coordinated development between large, medium and small-scale cities and towns. Second, we must remove the institutional obstacles that are hindering the migration of the rural population into towns and cities. In regard to entering into cities, the key problem that needs to be addressed is the issue of household registers and the rights and interests associated with them. Large cities should strengthen and improve supervision of the population, whilst medium and small-scale cities and towns should relax the criteria for settlement in line with actual conditions and gradually accommodate eligible rural migrants as permanent urban residents. With regard to rural migrant workers who are unable to become urban residents in the short term, we must attach importance to protecting their legitimate rights and interests by institutional means and gradually address the actual problems that they face, such as the schooling of their children, equal employment opportunities, welfare housing, and social security. Third, we must promote an integrated development of urban and rural economies. We must continue to implement the policy of nurturing agriculture through industry, supporting the rural areas through urban initiatives, and increasing investment, relieving burdens and loosening controls. This will help us to speed up the improvement of working and living conditions in rural areas. We need to put exchanges of factors of production between urban and rural areas on a more equal footing and take steps to direct the use of income from land value increases toward agriculture and rural areas. We need to give further play to the influence that cities exert on the development of rural areas, promote sound interactions between urbanization and the development of a new countryside, and continuously enhance the spending power and investment capacity of urban and rural residents.

 Two, we need to rationally adjust the distribution of national income to enhance the spending power of residents. We need to deepen the reform of the income distribution system during the Twelfth Five-Year Plan period, make efforts to increase the proportion of resident incomes in the distribution of national income, and increase the proportion that labor remuneration accounts for in the primary distribution of income. First, we must create a more ideal environment and institutional conditions to support the increase of employment and labor incomes and promote equal opportunities. We should implement a more active employment policy, creating job opportunities through multiple channels and encouraging people to start their own businesses, to promote full employment. We need to establish a unified, standardized and flexible human resources market and remove the market barriers between urban and rural areas and between different regions to provide laborers with high quality and efficient employment services, and thereby ensure that laborers receive reasonable remuneration through equal competition. We need to gradually raise the minimum wage, improve the mechanisms for the regular growth of employee wages, and enhance the payment guarantee system. Second, in line with the principle of placing a greater emphasis on fairness, we need to strengthen the regulatory role that taxation plays in the distribution of income. We need to actively promote the reform of individual income tax and establish a system in which income tax is calculated on the basis of both aggregate and categorized incomes. This will help us to increase the regulation of excessively high incomes by means of taxation. We should research ways of furthering reforms aimed at introducing real estate tax and enhance the regulation of property income. In addition, we should also promote the development of charitable causes and emphasize the role of tertiary distribution in the regulation of income. Third, we must further regulate the process of income distribution. We need to improve the way that earnings statistics are compiled and establish a national system for the investigation of salaries and the publication of related information. In addition, we must establish a sound income declaration system aimed at high earners. We need to improve the system of income distribution in order to gradually reverse the widening of the income distribution gap, boost the spending power of low earners, and increase the willingness of medium and high earners to spend and further promote consumer spending.

 Three, we need to improve the basic public service system to encourage more favorable consumer expectations among residents. China’s basic public service system has undergone constant improvements over recent years, while support to improvement of the livelihood of the people has been continuously stepped up. In 2009, combined spending on education, medical care, social security and welfare housing accounted for 29.8% of the government’s total expenditure, representing an increase of around 8 percentage points over 2004. However, the Chinese government’s expenditure on public services remains low in comparison with the world’s major economies, whilst the problem of uneven distribution in expenditure is also prominent. The result is that residents have had to devote too much of their incomes to rapidly increasing fees in education, medical care, social security and housing. This has not only inhibited the growth of consumer spending in other areas, but also forced residents to increase their savings and reduce immediate consumer spending. During the Twelfth Five-Year Plan period, we need to further increase the proportion of government expenditure that goes towards improving the livelihood of the people and social programs and expand the coverage of social security to progressively enhance the development of a basic public service system that caters to the realities of the country, covers both urban and rural areas, and is relatively complete and sustainable. We should focus our efforts on the following tasks. First, we should increase investment in education, rationally allocate public education resources, deepen educational reforms, and strive to promote equal opportunities in education. Second, we should accelerate the reform and development of medical and health programs and provide basic medical and health care to the whole people as a public product in line with the requirements of ensuring the basic needs, strengthening the community institutions and establishing mechanisms. Third, we should improve the social security system that covers both urban and rural areas. It is important that we take bigger and more substantial steps forward in aspects such as expanding coverage, raising the level of benefits, turning over management to higher-level authorities, and realizing unity in systems. Fourth, we should place a greater emphasis on the construction of welfare housing. We should speed up the formulation and continuous improvement of policy systems in finance, taxation, investment, financing and land supply, enhance the functions of governments at all levels, build more welfare housing, accelerate urban renewal in shanty areas, develop public rental housing, and increase the supply of housing for medium and low earning residents.

 Four, we need to create an environment more conducive to consumer spending in order to actively promote the upgrading of the consumption structure. China’s GDP per capita exceeded US $3,700 in the year 2009. In the future, the consumption structure in China is expected to transform at an accelerated pace, which will present sound conditions for the increase of domestic demand, especially consumer demand. During the Twelfth Five-Year Plan period, we need to focus on creating a sound policy environment and social atmosphere to support the upgrading of the consumption structure, and thereby further unlock consumption potential among urban and rural residents. First, we need to strengthen the market distribution system. We need to accelerate the construction of infrastructure to underpin urban and rural consumer spending, actively develop e-commerce and establish a sound marketing system for modern consumer goods to provide residents with greater convenience in terms of consumer spending. Second, we need to create a more favorable environment for consumer spending. We need to further regulate the market and safeguard the legitimate rights and interests of consumers so that they can engage in consumer behavior safely and with peace of mind. Third, we need to rationally channel consumer behavior. We need to establish new notions of consumer spending, develop environmentally friendly consumer spending, and advocate a civilized, resource-conserving, green and low-carbon mode of consumer spending. Fourth, we need to speed up the development of the service industry. China’s service industry has huge potential for development. However, owing to the fact that the development of the service industry has lagged for a long period of time, its strengths in driving forward industrial development, increasing employment, and promoting consumer spending have yet to be brought into full play. We need to open up new areas of the service industry, develop new forms of business, and actively nurture hot spots of consumer spending to increase the weight of the service industry in the national economy.

 Five, we need to adjust and optimize the investment structure and encourage the growth of private investment. During the Twelfth Five-Year Plan period, in addition to ensuring that investment grows at a moderate pace, we also need to continuously optimize the investment structure and improve the quality and efficiency of investment so that it effectively drives economic growth. First, we should make full use of government investment. We should ensure that key national projects under construction and ongoing projects that are aimed at boosting domestic demand are completed and yield their intended benefits, especially during the initial stages of the Twelfth Five-Year Plan period. Second, we should continue to subscribe to a differential policy that involves applying pressure in certain areas and offering incentives in others, and we should also strengthen and improve our investment management. We need to give play to the role of industrial policies in order to tilt investment toward public welfare and social programs, agriculture and rural areas, scientific and technological innovations, ecological and environmental protection, and resource conservation. At the same time we also need to ensure that more investment goes towards central and western regions. Third, we should promote sound interactions between investment and consumer spending. To do this, efforts to increase investment should be effectively integrated with efforts to increase employment and improve the livelihood of the people in order to create final demand. Fourth, we should encourage the expansion of investment from the private sector. We should take steps to relax restrictions on investment from the private sector and allow it to invest in any field that is not explicitly restricted by national laws, regulations or policies. With regard to areas that private sector investment is unable to penetrate, we must clear away the obstacles as soon as possible through the reform of industrial management systems to create an environment characterized by fair competition and equal access for both public and private investment.

 We must be fully aware that external demand is still a highly important and indispensable aspect of our economic and social growth at the current stage. During the Twelfth Five-Year Plan period, it is essential that we balance the relationship between domestic demand and external demand. As we continue our efforts to base our economic development on domestic markets, keep the initiative in our own hands, focus our policies on the comprehensive increase of domestic demand, and make full use of the large space for maneuver and huge potential demand in Chinese economy, we should also continue to give consideration to the world market, pursue gains and avoid risks, conscientiously implement a policy to stabilize external demand, and make efforts to steadily expand our share of the international market. This approach will allow us to achieve a mode of economic growth that is driven on by a rational balance of consumer spending, investment and exports. 

(Originally appeared in Qiushi Journal, Chinese edition, No.21, 2010)

Note:  Author: Director of the Research Office of the State Council of the People’s Republic of China   

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 Research Office of the State Council

 The Research Office of the State Council is an agency under the State Council of the PRC that is responsible for general policy research and provides consultative service for the main leaders of the State Council in their decision making. This agency is responsible for organizing or participating in investigation and research of major issues related to implementation of the reform and opening up policy and economic and social development in order to provide policy recommendations and informed opinions. It is also responsible for drafting the government work report, leading the organization for the drafting of documents for major State Council sessions and participating in drafting of documents for major CPC Central Committee sessions. The Research Office acts alone for or organizes and coordinates the drafting or revision of major documents of the State Council and drafts some important speeches of leaders of the State Council as directed by leaders of the State Council. It carries out analysis and study of the domestic and international economic situations and the economic and social development policies of all major countries in order to provide policy recommendations. The office also collects, analyzes and compiles important information concerning the state of economic and social development and reports to the State Council as reference and recommendation for its decisions.

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