Stimulating domestic demand to ensure sustained growth

China, relatively unscathed by the Asian financial crisis, is now facing a tough external economic environment. since the beginning of 1999, growth of the global economy and trade has slowed down, due to the impact of the Asian financial turbulence, Russian economic and financial mayhem and the Brazilian financial turmoil. In particular, Southeast Asian countries -- major destinations of China's exports -- are recovering and becoming more competitive after having devalued their currencies.

In 1999, China has set its sights on achieving a growth rate of 7 percent for its gross domestic product (GDP). Early statics for the beginning of the year suggest that 7 percent is going to be a tall order. According to the Chinese Customs, exports and imports in the first three months of 1999 rose by just 0.3 percent to reach US$70.26 billion, the lowest growth in the past two decades. Exports actually dropped by 7.9 percent, while foreign direct investment sank 14.6 percent.

Foreign trade had been a major feature contributing to China's phenomenal economic growth in the last 20 years. Since the Asian financial crisis broke out in 1997, China's foreign trade has suffered. In 1998, both Chinese authorities and economists held that expanding domestic demand would be an important stimulator for maintaining sustained growth of the country's economy.

Home market can sustain growth

In 1998, China's GDP grew by 7.8 percent over the previous year, 0.2 percentage points below the planned rate. "In view of the Asian financial crisis and devastating summer floods last year, achieving this growth rate is quite a feat," said Luo Deming, a senior researcher with the Chinese Academy of Social Sciences.

"This was owed to decisive measures taken by the government to increase capital spending on infrastructure, stimulate domestic demand and invigorate the market," he said.

At a special national conference at the end of 1998, devoted to economic affairs, the Chinese government decided on expansion of domestic demand as a long-term strategy for economic growth. At the same time, Zeng Peiyan, minister of the State Development Planning Commission (SDPC), outlined measures to keep this policy on track, including increased investment in fixed assets, more attention to untapped markets in rural areas and continuation of a proactive fiscal policy.

Deputy director of the Economy Research Institute under SDPC, Bai Hejin, said "Given its own enormous size, actually, China shouldn't be too dependent on exports for economic growth."

"That's because a large country like China possesses great internal market potential and demand of its own," he said.

Quoting the United States as an example, BAi said that the U.S. is the world's largest exporter yet its exports generate only 12 percent of its GDP, while for China, exports account for 20 percent of its GDP. "With its 1.3 billion population, China is a huge market in its own right. It's quite possible for China to maintain a sustained rate of economic growth by expanding domestic demand."

In 1998, government spending on infrastructure projects such as highways, railways and power plants increased dramatically. In July of that year, the Ministry of Finance announced its intention to raise total spending on highway construction to 180 billion yuan ($21.7 billion), up from a planned 120 billion yuan ($13.2 billion). In August 1998, the government issued 100 billion yuan ($12 billion) worth of additional treasury bonds, also for capital spending on infrastructure projects.

This year, China has continued to spend more on the country's essential nuts and bolts -- its roads, bridges and tunnels. The government planned early this year to issue 316.5 billion yuan ($38.13 billion) worth of treasury bonds and increase total investment in fixed assets by 12 percent. Not long ago, the state treasury decided to spend an additional 30 billion yuan ($3.6 billion) on agricultural, forestry and water conservancy projects.

The State Statistical Bureau's deputy director, He Jian, said, "With half of last year's additional 100 billion yuan income form the sale of treasury bonds left in the coffers, what remains in reserve can still be used to stimulate domestic demand."

To ensure that projects which began in 1998 are completed on schedule, an additional 25 billion yuan ($3 billion) worth of loans -- a booster fund -- is available for infrastructural projects in transportation, communications, power-grid upgrades in rural areas, grain storage facilities and major urban works.

Meanwhile, China is ready to launch at the earliest opportunity a batch of new projects that help elevate technological levels, promote industrial upgrading and improve product mixes.

Expanding consumer demand

A researcher with the China Institute of Modern International Relations, and a member of the Standing Committee of the China International Economic Cooperation Society, Hou Ruoshi, said, "China needs to stimulate domestic demand, individual consumption in particular. This is commonly acknowledged in domestic economic circles."

Faced with an unfavorable external economic situation, said Hou, the overall economic increase may reach 7 percent to 8 percent if China's individual consumption can sustain a growth rate of more than 10 percent.

Despite four interest rate cuts in 1998, individual savings deposits continued to rise. According to analysts, while the present supply of goods exceeds market demand, the latter is far form being in a state of saturation. "In China, many factors have depressed the public's desire to consume," Hou said. "For example, right now people think it's more important to save their money to prepare themselves for all the basic necessities of life that they will no longer receive from the state at nominal charges -- housing, health care, pensions and education."

Hou also noted that large numbers of people have been sidelined from consuming by their change in employment circumstances. In 1998, millions of workers were laid off by state-owned enterprises, while the poor economic performance of many surviving enterprises resulted in basic wage payouts at best -- without bonuses -- and sometimes the postponement of paydays. All these factors have plunged millions of families into financial hardship and uncertainty.

To stimulate consumption, economists suggest, it is necessary to enhance transparency in structural reform, improve the social security system, intensify housing reform, eliminate public worries that depress the desire to consume, and meet the public's psychological expectations.

"This will help divert part of the 6,000 billion yuan ($722.89 billion) in savings deposits to the consumption market," Hou said. Meanwhile, it is essential to adjust the distribution of people's incomes. In reality, while high-income consumers deem many surplus goods unnecessary, people with low incomes find them unaffordable.

The government, economists suggest, should increase the income level of people with medium and low incomes. At the same time, it is necessary to increase farmers' incomes and reduce their financial burdens. And incomes of public servants should also be increased by an appropriate extent.

Easier credit

Expanding domestic demand was regarded as a main strategy in the country's efforts to boost economic growth in 1998. Yet efforts to stimulate consumption were not very successful due to a lack of basic policy support. Making credit more easily available is one of the government's support policies this year. There is considerable demand for more credit from millions of urban individuals wanting to buy apartments, furniture, cars and IT equipment: PCs and peripherals.

Meanwhile, the central bank said that all commercial banks in 1999 will have access to consumer credit business and be able to grant more loans for big purchases such as flats and cars. The Industrial and Commercial Bank of China has launched a new loan service to support private purchasing of computers and furniture. The bank is the first of the four state-owned commercial banks in the country to offer such loan facilities.

According to reports in Economic Daily, in the long-term, China has the capacity to maintain growth in consumption because of a low per capita gross domestic product -- only $700 -- and a low per-household ownership level of consumer durables and infrequent service consumption.

China's rural population comprises about 900 million potential customers whose families are yet to enjoy the comforts of electrical appliances such as fridges and washing machines. Bringing in this vast number into the market could create an enormous demand for products from domestic manufacturers.

"But before the rural market can be brought into full play, said Zeng Peiyan, "We need to improve infrastructure facilities there -- water and power supplies, roads and telecoms."

But Hou Ruoshi warns that China will not always be able to rely upon its massive home advantage. "China will eventually face many difficulties if it simply relies on the domestic market to maintain its economic prosperity and development," he said. "However, the country's tremendous domestic market and huge market demand remains a major advantage. Even faced with an unfavorable external economic environment, China is expected to continue its sustained and steady growth and achieve its economic goal for 1999."