(China Daily)
Updated: 2007-07-13 11:11

It has become increasingly more evident that Chinese consumers are embarking on a spending spree. To sustain it, policymakers should focus more attention to dismantling barriers that discourage people to loosen their purse strings.

A new report by the State Information Center under the National Development and Reform Commission, has painted a very rosy picture about growing domestic consumption.

It predicts that China's retail sales will grow 15.8 percent, the fastest rate in a decade, to reach 8.8 trillion yuan ($1.16 trillion) this year.

Given the recent acceleration in retail sales, such a forecast appears to be on track. In May, the country's retail sales rose 15.9 percent from a year earlier to 715.8 billion yuan ($94 billion) after gaining 15.5 percent in April.

Admittedly, in comparison with the country's robust investment and export growth, the current expansion of retail sales pales. But the gradual acceleration of domestic spending is crucial to reducing the country's reliance on investment and exports for growth.

If domestic consumption rises to be a major growth engine, China will be able to more aggressively rein in investment growth that adds to the country's energy, resource and environmental costs and check the surge of exports that aggravates the country's trade imbalance.

The report details a number of driving forces behind the consumption boom. Higher urban and rural income, rising food costs, improving social security, and a rapid increase in restaurant sales this year have facilitated a faster growth in urban and rural spending.

The report even suggests the government should not curb the rise in the stock market and consumer prices "too harshly" so as not to disturb the consumption boom.

The apparent logic behind this argument seems to take both the wealth effect from the stock market and the "moderate" level of inflation as a booster for domestic consumption.

However, the wealth effect remains very elusive as the country's stock market remains far from mature. And the impact of "moderate" inflation differs a lot for various income groups given the huge wealth gap between them.

Hence, it is the government's recent efforts to raise minimum wages and increase welfare spending that have played a decisive role in boosting consumption.