Yu Bin, Chen Huai, Zhang Liqun

Expanding domestic demand is an important measure to alleviate the current economic difficulties as well as a strategic choice to ensure a sustainable and rapid development of the national economy. There is much room for expanding investment and consumption demands in China, which is sufficient to support a steady growth of the national economy.

Expanding domestic demand is a basic proceeding point for China's economic development

The structural over-capacity and the inadequate demand are the serious problems existing amid the current economic operation. In the first half of this year, the total volume of total consumer goods retail sales and the increase rate of fixed asset investment have seen a continuous slowing-down. Although interest rates were lowered, urban and rural households' deposit balance has further grown, and the gap between the banks' deposits and credits is constantly widening. Affected by global over-production and price fall, China's exports have also declined while imports have grown drastically, leading to greater external shocks to the domestic market. There are more and more products facing shortage of demand and prices are continuously at a low level. By the end of June, the country's commodity retail sale prices and the households' consumption price index have been declining consecutively for 21 months and 15 months respectively. Quite a few enterprises cannot operate in their full capacity and are facing more and more difficulties in operation, which lead to the increase of the unemployed and laid-off workers. The government has adopted various policies to expand demand, which have seen some initial effect, but have not fundamentally changed the sluggish market situation.

The market situation with a relative over supply in China came at a low level of industrialization, urbanization and income. In addition to the factors relating to the economic institutional transformation and the changes of the external economic environment, the root cause for such a situation is structural discordance within the Chinese economy. Firstly, industrialization and urbanization are not developed in a co-ordinated way. Urbanization is an important condition for the expansion of infrastructure investment and consumption in the course of industrialization. The lagged urbanization curbs expansion of demand. Secondly, dis-coordination in urban and rural developments. Rural households' income is much lower than that of urban households. In recent years, the former's growth rate tends to slow down. The gap between rural and urban consumption structures is yawning, making it hard for them to be linked smoothly. Thirdly, dis-coordination in production and consumption structures. Households’ living conditions have become fairly well-off, but the production structure has not been upgraded in time, nor can it suit the change of market demand. The contradiction between supply and demand is becoming sharper and sharper. Fourthly, dis-coordination in the redistribution mechanism and the widening income gap. No sufficient policy measures have been adopted to regulate income distribution. The marginal propensity to consume (MPC) of the high-income stratum is fairly low while the potential demand of the low-income stratum cannot be translated into actual demand due to the restraint of their income. Fifthly, dis-coordination between the economic expansion and the structural optimization. Excess investment in low–tech goods has led to over capacity in ordinary manufacture whereas most of the projects do not reach the economy of scale. Affected by institutional factors, the stock resources can be hardly traded, making the industrial restructuring very difficult. Sixthly, dis-coordination between foreign trade dependence and international competitiveness of the industries. The international competitiveness of the Chinese industries will not be strong enough to support the fast growth of exports as that in the past 20 years. Some products have turned to the domestic market as they become less competitive against foreign rivals, sharpening the supply-demand conflict. Seventhly, dis-coordination between the reform and development. Many sectors face over capacity while lacking effective elimination mechanism. Technological progress speeds up while lacking support of venture capital. The incompleteness of reform measures, the low ebb of the economic cycle, the increase of unemployment and the imperfection of the social security system--all these have intensified the households' expectation of income slowing-down and expenditure increase, which is a hindrance to consumption growth. Actually, the above-mentioned problems are all related to the dis-coordination between the processes of reform and development.

As the main difficulty of economic development has changed from the restraint of the supply side to that of the demand side, expanding demand, especially domestic demand, has become a basic proceeding point for China's economic development. Stressing expansion of domestic demand does not contradict improving supply, which is an important means to expand domestic demand as well as a focal point of our efforts. Emphasizing expansion of domestic demand does not contradict opening-up policy. As a basic state policy, opening-up is behind the great achievements of the country's economic development and reform in the past two decades. Adhering to the basic policy of opening-up and making best use of the domestic and foreign markets and the two kinds of resources are the indispensable condition for a sustainable and rapid economic development. But for a large country like China, economic development has to depend mainly on the expansion of domestic demand. The high-speed economic growth in the past 20 years or so has been realized amid the rapid expansion of domestic investment and consumption. Most of the countries in the world, except a few small countries with unique conditions, have maintained their economic growth mainly through boosting domestic demand and the home market.

Expanding domestic demand as a basic point for economic growth is one of the keys to maintaining a sustainable, rapid and healthy development of the national economy. Expanding domestic demand includes expanding investment and consumption, which are coexisting and supplementing each other. The ultimate goal of investment expansion is to meet consumption demand while the increase of consumption relies on the growth of investment and improvement of supply. At the current stage of the economic development, prospects for expansion are bright, either for investment demand or for consumption demand.

Broad room for expansion of investment demand

Judged from the current situation and the mid- and long-term development trend, China's expansion of investment demand counts on the following aspects:

I. Promotion by the upgrading of the industrial structure. China is a large developing country with vast areas for development and a great number of infrastructure facilities to be built. There is much room for the development of the primary, secondary and tertiary industries, thus leaving a broad space for investment. From 1980s to mid-1990s, investment demand mainly derived from the expansion of the ordinary industries. Since the middle of the 9th Five-year Plan, the growth of investment demand has depended more and more on the upgrading of the industrial structure. Structural upgrading means the progress of technology as well as the deepening of division of labor among industries. If we say that the reduction of spindles in the textile industry, the mine shutdowns in the coal industry and the output limitation in the iron and steel industry are governmental compulsory shrinkage measures in the light of their high-cost, low-tech and unmarketable products, then it is the market force that has been pushing forward the rapid development of computers, networks, telecommunications and new electronic home appliances.

The investment demand yielding from the upgrading of the industrial structure is mainly found in the following four aspects. First, the development of new industries. A great deal of investment opportunities come from constant scientific and technological progress and the emergence and development of new industries. The rapid growth of the information industry is a typical case in point. Second, the raising of the overall industrial level. To cope with the challenges from economic globalization and China’s entry into WTO, we should improve industrial competitiveness at the international market. To adapt the industries to the structural changes of demand, we should hasten the upgrading of the product mix and the quality. To reduce environmental pressure and implement the sustainable development strategy, we should develop resource-saving and “clean” industries and products. The intensity of investment demand in these aspects should be no less than that during the early stage of industrial expansion. Third, pushing forward the development of in-depth import-substitute. The emphasis should be placed on equipment, basic components and basic materials, that is, we should try to improve our own capacity on the base of absorbing and digesting foreign technologies to change the situation of too much dependence on import. Fourth, expanding the supply of new consumer goods and services. Housing, cars, tourism, entertainment and other new types of consumption as well as insurance, education and information services, will become new hot spots for investment.

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