Domestic demand engine for growth

China's manufacturing activity fell to a nine-month low in August as domestic firms struggled with economic troubles at home and abroad.

Recent HSBC data show that China's purchasing managers' index, which gauges national manufacturing activity, hit 47.8 in August, its lowest score since November 2011. According to international practice, a PMI reading of above 50 indicates economic expansion and a reading below 50 indicates contraction. What's more, the country's preliminary manufacturing output index declined from 50.9 to 47.9 in July, also showing a five-month low, as indicated by the British banking company's data.

In August, the number of export orders received by China hit a 41-month low, dragging down the month's manufacturing figures and suggesting that the external demand for Chinese manufactured goods has declined greatly.

The August PMI figure came as no surprise. In general, China's broad economic indicators have declined considerably since the second quarter of this year. From the first half of 2011 to the first half of this year, for instance, the growth rate of its gross domestic product fell below 8 percent, a figure the Chinese government has long tried to keep GDP growth at or above. The second quarter, in particular, saw the country's economy grew by 7.6 percent, its lowest rate in more than three years. Important economic data released earlier this month for July, including those for foreign trade, industrial output and retail sales, all pointed to persistent weakness in the world's second largest economy. The continuing decline in GDP growth is a sign that China's economy is losing momentum.

To fight the economic slowdown, the Chinese government has adjusted its established fiscal and monetary policies and taken a wide range of other measures.

Experience suggests that government-led increases in investment have played a crucial role in bolstering China's economic growth. In previous slowdowns, the government has almost always initiated substantial campaigns of investment and succeeded in prompting instant and rapid GDP growth. This can be seen in the fact that China's economy outperformed other countries' amid the recent global financial troubles. Even so, stimulating growth through economic investment has also impeded China's ability to sustain its development. For example, the country is still struggling to rein in inflation and property bubbles, both products of its recent investment spree.

At a time when steadying economic growth is once again a priority, the government should be particularly cautious about pulling out the arrow of stimulus investment from its quiver of policies.

Faced with a new deceleration in economic growth, local governments in China have recently proposed a series of industrial development programs that mainly call for increases in investment. Such governments have so far announced plans for making 7 trillion yuan ($1.1 trillion) worth of investments, according to statistics. That will exceed the 4-trillion-yuan stimulus the Chinese government passed following the advent of the global financial troubles in 2008.

It is true that more investment can boost a country's GDP in the short term. At the same time, unless a balance is struck with other economic forces, it can prove a hindrance.

At the moment, one large threat to the Chinese economy is a lingering weakness in domestic demand. In the past, the shift of industry away from developed countries allowed external demand to make up for the insufficiencies seen in China's internal demand, thus paving the way for a golden period in the development of the country's manufacturing. Now, though, changes within developed countries' economies, such as the "re-industrialization" now occurring in the United States, give China's manufacturing industry less room to develop while putting pressure on its foreign trade.

It will therefore be difficult to keep having investments and exports be the driving forces of the Chinese economy. What the country most needs is to galvanize its now-languid domestic demand.

One way to do this would be to eradicate long-standing defects in the country's system of distributing income, which has not prevented the incomes of ordinary people from remaining relatively low.

An increase in the spending power of such people would undoubtedly go far to invigorate domestic demand, thus laying the foundation for the steady growth of the Chinese economy.

The author is a Shanghai-based economics commentator.