BIZCHINA> Review & Analysis
Consumer resilience
(China Daily)
Updated: 2008-08-15 14:51

Lower-than-expected consumer inflation has only made the acceleration of retail sales growth last month much more assuring for Chinese policymakers.

To maintain fast economic growth, however, the government should further boost domestic consumption with fiscal incentives.

Domestic retail sales soared by 23.3 percent year on year to 862.9 billion yuan in July. The growth rate, the fastest in 12 years, was 6.9 percentage points higher than in the same period last year and 0.3 percentage points higher than in the previous month.

With consumer inflation cooling for a third month, dropping from 7.7 percent in May and 7.1 percent in June to 6.3 percent last month, the new retail sales figure highlighted the solid upward trend in domestic consumption in real terms.

Such a consumption boom should give a shot in the arm for the authorities who are pressing ahead with transformation of the country's economic structure. To pursue sustainable growth, policymakers have been adopting various measures to cut the country's dependence on energy-and-resource-intensive investment and export for economic growth.

But recent deceleration of fixed-asset investment growth and weakening external demand have ostensibly prompted official concerns over preventing the economy from slowing down too much. If these two growth engines continue to lose steam, China may risk a serious economic slowdown that can exacerbate its unemployment problem.

Now, an impressive pace of growth of domestic consumption provides the economy a much- needed cushion against export-led slowdown or investment deceleration.

With a fiscal surplus of more than 1 trillion yuan in the first half of this year, the government can readily sustain fast economic growth with fiscal stimulus. Yet, it is particularly undesirable to do so by simply easing fiscal restraints on energy-consuming and polluting investment and export.

Instead, more fiscal expansion should focus on supporting consumption. Such measures as raising the threshold of personal income tax, removing the tax on interest income from deposits and more subsidies to low-income households can all underpin the remarkable growth momentum of domestic consumption.

The current consumption boom testifies not only the people's desire to improve their living standard but also the effectiveness of policies to boost growth of people's income. It is worthwhile to pledge more fiscal resources to build domestic consumption as a more powerful growth engine.

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