Spend way out of economic woes?

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By Yan Xianpu (China Daily)
Updated: 2009-06-01 16:43

While China's export and investment growth remained at a low level in the first quarter, domestic consumer spending increased rapidly, helping to offset the impact of shrinking foreign demand and weaker investment.

As the global economy continues to slow, domestic consumer spending is likely to remain strong in the coming years and has the potential to become the main driver of the Chinese economy.

According to the National Bureau of Statistics, consumption accounted for 4.3 percentage points of China's 6.1 percent GDP growth, compared with 0.2 percentage points for net exports and 2 percentage points for investment. Consumption rose to become the largest contributor to China's GDP growth over the period.

Meanwhile, retail sales expanded 15 percent in the first quarter. After being adjusted for inflation, they grew 15.6 percent year-on-year.

The performance of the auto and property sectors largely confirmed these figures. Auto sales rose 24.97 percent in April to 1.15 million units, hitting a fresh record and making the country the world's largest auto market for the fourth consecutive month, the China Association of Automobile Manufacturers reported.

Housing sales also rebounded. Industry specialists said the sector's sales volume grew more than 100 percent year-on-year in the first quarter in Beijing, Shanghai and Shenzhen. The government's efforts to promote home appliance sales also started to have an impact.

Total sales of these products reached 4 billion yuan in the first quarter, up 72 percent from the previous quarter. Home appliance sales reached 2.24 billion yuan in March alone, while sales grew 17 percent in China's countryside, outpacing urban areas for the first time.

Is this growth sustainable? How about its potential? These questions are important to the sustainability of China's development and the pace of its growth. Consumption is likely to remain a major driving force of the nation's growth.

Population is also a major factor when it comes to consumption. The size of a nation's population decides the size of its market and its consumer potential. There are two aspects that affect the growth of retail sales: population growth and demographic changes.

Between 2006 and 2008, China's population increased by 6.82 million. According to preliminary estimates, a 7 million increase in China's population will add 30 billion yuan to annual consumption and help retail sales grow by an annual average of 0.5 percentage point.

Meanwhile, ongoing urbanization will also help spur domestic consumption. Some analysts estimate that an increase in the urbanization rate by 1 percentage point results in a 1.6 percent increase in consumer spending.

China's urban population grew by 10 million annually between 2006 and 2008, with urbanites' consumer spending around 2.7 to 3 times that of their rural cousins.

Now, a significant part of China's population is at the age of peak consumer spending. The baby-boom generation of the 1960s is now entering middle age, the period of strongest purchasing power. This means that the next decade could be a period of extremely rapid growth in China's consumer spending.

International experience shows that consumer spending peaks between the ages of 40 and 50.

In general, young people are more aggressive when it comes to spending and more willing to borrow, while senior citizens are less likely to fork out for new consumer goods.

Besides individual spending, expenditure by various social groups has also increased in recent years. For example, the Chinese government is updating its IT system and local authorities are also increasing spending on urban infrastructure.

According to the Ministry of Finance, the nation's administrative spending grew by an average of 17.4 percent between 1990 and 2007, much faster than its GDP growth.

Chinese people's rising living standards will also help spur consumption. China's per capita GDP has passed $3,000 and international experience show consumers pay more attention to the quality of services and products at this stage. Some new consumer hotspots have also emerged in recent years, such as mobile phones and automobiles.

The China Association of Automobile Manufacturers (CAAM) has upgraded its forecast for this year's automobile sales to 10.2 million units, with year-on-year growth rate of 8.7 percent, up from the 5 percent projection earlier this year, said Dong Yang, its deputy director.

The auto sector experienced the strongest sales growth in 2006 and 2008, followed by mobile equipment at 50.4 percent and 28.9 percent for home improvement products.

Meanwhile, the purchasing power of urban residents also increased. In 2007, more than 40 percent of urban families had a disposable annual income of 16,000 yuan, while this figure reached 36,000 yuan for 10 percent. The purchasing power of such medium- and high-income groups is hardly affected by inflation. And despite the slump in stocks and the property market, their consumption didn't shrink. Some in these groups have developed a taste for luxury goods such as antiques and jewelry. For example, statistics show jewelry sales surged 41.7 percent in 2008.

The author is a statistician with the National Bureau of Statistics

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