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Generating more consumption
By Qi Jingmei (China Daily)
Updated: 2004-06-04 10:04
Consumption demand, as a key engine propelling economic growth, should be
stimulated with proper policies.
As China enters a new phase of industrialization, investment demand, the
pillar of economic progress for now, will see a diminishing role. At the same
time, consumption will take its place and become a steady contributor to
continued growth.
However, domestic consumption is still not strong enough to hold its position
in recent years.
China's gross domestic product (GDP) growth has slowed down since the mid
1990s. The average annul GDP growth between 1996 and 2003 was 8.1 per cent, 2.1
percentage points lower than that between 1980 and 1995.
The major reason for this decrease is the sluggish growth of consumption.
The retail sales of consumer goods rose by 16.3 per cent on average every
year from 1980 to 1995 while the growth rate dropped to 9.1 per cent from 1996
to 2003.
There are several factors behind the dormant consumption.
First of all, quick growth in urban consumption is difficult to sustain.
Urban residents witnessed dramatic improvement in their living standard over
the past two decades. By 2002, on average, every 100 urban families owned 126
colour TV sets, 93 washing machines and 87 refrigerators.
The ownership rate of durable consumer goods in Chinese cities is among the
highest in the world. So the consumer goods growth is unlikely to see further
growth in the near future.
Low-income urban residents, who have potential consumption demand, could
become the source of new consumption.
However, including the unemployed, laid-off, retired and those working in
companies with poor revenues, the urban low-income groups do not have enough
purchasing power to transform their potential into real demand on the market.
As a matter of fact, China's 500 million urban residents account for only
around 40 per cent of the nation's population of 1.3 billion, while their
consumption demand accounts for 65 per cent.
Comparing those two proportions, it's obvious consumption growth driven by
the urban population cannot maintain its momentum over the long run.
The majority of China's population - rural residents - are seeing widening
gaps between themselves and urban residents in terms of income and consumption
growth.
This is one of the most important factors behind lingering consumption rise.
Despite the government's painstaking efforts to improve farmers' incomes, the
average income of rural residents remains mired in stagnation.
In 2003 the average annual net income for every rural resident was 2,622 yuan
(US$315.9), which is roughly the same as the average annual income of urban
residents in 1993.
With their income lagging 10 years behind, farmers' ownership of durable
consumer goods is only comparable to that of the urban citizens in the 1980s.
Differences between urban and rural populations aside, government consumption
grows so quickly that it has limited the sound growth of residents consumption.
"Government consumption" represents the costs paid by the government on
public services provided to society free or at a low price.
Between 1980 and 1990 government consumption rose by 13 per cent annually and
private consumption grew by 14.6 per cent, 1.6 percentage points higher.
Since the 1990s government consumption has accelerated its growth and
reversed its position with private consumption.
The annual growth of government consumption from 1991 to 2002 was 16.3 per
cent while private consumption rose by only 14.8 per cent.
Government consumption and private consumption usually stay at each end of a
seesaw. With government consumption high up, private consumption will be
somewhat pressed down.
Private consumption is supported by a large population, therefore, it has a
much greater potential to promote total consumption growth.
So the quick growth in government consumption acts as an obstacle to the rise
of the overall consumption demand in China.
As a whole, citizens of China have not fully enjoyed the benefits of the
nation's impressive economic growth over the last two decades.
Consumption by the people has not advanced at the same pace as the economy.
The per capita output growth exceeds the rise in per capita consumption,
especially in less developed regions.
The country's GDP had a 9.5 per cent annual growth on average between 1980
and 2002 and the per capita GDP grew by an average of 8.2 per cent during the
same period. But urban consumption and rural consumption stood at only 6.8 and
6.3 per cent respectively at the same time.
These statistics indicate the fortune created by economic development is
spent on further production or accumulation and the average person has not seen
substantial improvement of life.
Based on this analysis, measures to stimulate consumption must be directed to
eliminate the factors mentioned above.
First, urbanization must be promoted with utmost effort.
With their convenient living facilities, cities can generate consumption
growth effectively. Only when urbanization is accelerated and more rural people
become city dwellers can consumption really be geared up.
By 2003 the proportion of urban residents in the total population stood at
around 40 per cent. It will be ideal if this rate maintains growth of 1.5 to 2
percentage points annually for the next few years and reaches 10 per cent by
2010.
With the urbanization rate going up 1 percentage point, more than 15 million
rural residents could move into cities and towns. The consumption created in
this process would amount to tens of millions yuan and boost the GDP growth by 1
to 2 percentage points.
Second, policies must be made to improve consumers' income.
With higher income, consumers will have stronger purchasing power and the
measures stimulating consumption could hit home.
Besides increasing the revenues from low-income urban groups and rural
residents, the authorities should also reform the tax system to protect the
interests of low- and middle-income groups and narrow the income gap.
Third, a balance between government consumption and resident consumption
should be achieved.
It is necessary to change the situation that sees government consumption
growing much faster than resident consumption.
The government should increase its subsidies and aid to poverty-stricken
groups and under-developed regions. In this way, the government grants the
choice in consumption to those residents and increase their consumption.
The author Qi Jingmei is a researcher with the State
Information Centre.
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