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Spend, spend, spend!

By Yan Xianpu (China Daily)
Updated: 2008-10-27 11:26

As China's export market is running into rough weather due to weakening demand from US and European markets, the importance of boosting domestic demand is overwhelmingly manifested. It's high time for a batch of new fiscal and taxation policies.

Three engines imbalanced

Investment, consumption and exports are generally considered to be the three engines fuelling the economy. However, three factors have long been imbalanced.

Investment is still the primary momentum for economic growth. However, investment promoted by local governments takes a high environmental tolls and always runs against the preservation of farmland. In addition, market-oriented policy tools in macro-control do not work effectively, because these kinds of investments are not sensitive enough to cost-profit.

Over-dependency on foreign markets has worsened the situation. Once foreign markets plunge, the overcapacity of the domestic investment is doomed to follow.

The recent third Plenary Session of the 17th Central Committee of the Communist Party of China echoed the defects. It said that a prudent and flexible macroeconomic policy should be adopted to sustain the robust growth, in which, the role of stimulating domestic demand is emphasized.

In fact, the traditional export-driven economy faces a lot of uncertainties and risks. Whether short term or long term, China's economy has to shake off the dependency on exports and investment and rely more on domestic demand.

Why domestic demand?

So, what is the advantage of the internal market?

First, there is great potential in the vast rural market. Though the per capita income of rural residents is evidently lower than that of urban residents now, with a population of 800 million, the rural market still gives us a grand blueprint. Given the fact that an urban resident consumes three times as much as a rural resident, it is estimated that every percentage point of growth in urbanization would result in an extra 1.6 percent in eventual consumption. In addition, when migrant workers return to their villages, they are expected to awaken the awareness of consumption in the other villagers. Therefore, it is of great significance to accelerate the urbanization process.

Second, demographic dividends will bring the coming decade into a consumption peak. The 1960s experienced a baby boom. The babies born then will soon be in their fifties, which, according to general cases, is the peak age for personal expenditures. Moreover, the 90 million single children born before 1981 now are expanding their expenditure, and the 300 million single children born between 1992 and 1998 are stepping into their consumption age. What is more important is that their willingness on spending far surpasses the willingness to save.

Third, more consumer hotspots are emerging. Automobiles, real estate and other related products have a large space to boom. Take automobiles for example. Currently, 30 in every 1,000 Chinese own automobiles. In contrast, the world average is 120. It is estimated that sales of automobiles will expand at an annual rate of 12 percent from now to 2020.

Finally, the nation's urbanization and industrialization process is in its early phase, and the coming 10 to 15 years will see the economic scale soar. A number of areas, including medicine, culture, sports, entertainment, tourism and dining, which now account for only a small proportion of the residents' consumption, will gain tremendous room for development.

Combined efforts

However, as the world economy slows down, and it takes time for macro-control measures to impact, growth in the fourth quarter and next year may taper off. Boosting domestic demand is never an easy job. Apparently, raising incomes is the key solution, and a long term solution, too. At the moment, new fiscal and taxation policies should be combined to cope with the situation.

The waiving of the interest tax is a positive step, and more fiscal measures should follow. Different from the positive fiscal policy implemented in 1998, which focused on the construction of infrastructure, the current fiscal policy should raise expenditure in agriculture, energy saving, emissions reduction, independent innovation and social affairs. Reform of value added tax and the export tax rebate also need to accelerate.

Macro-controls in the next phase should underline the benefits for consumers, especially low-income consumers. A flexible price mechanism should be formed. In a word, the government should strive to create a better environment, encouraging citizens' consumption.

In addition, more efforts should be made to stabilize the exchange rate, the stock market and the real estate market. The challenge lying ahead is whether the government can bolster the confidence of investors, remaking the stock market into a real barometer of the economy.

The author Yan Xianpu is a senior expert with the National Bureau of Statistics. The views expressed in the article are his own.