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Domestic demand key to growth

By Liang Da | China Daily | Updated: 2008-04-15 07:25

Global uncertainties triggered by the US subprime crisis are likely to affect the Chinese economy, but we should not overstate the impact given that domestic demand is playing a bigger role in the nation's economic growth.

Net exports are one of three driving forces behind the Chinese economy. But the expected export slowdown due to the US recession will not sharply reduce China's economic growth rate, as some analysts have predicted.

In fact, domestic demand, which includes consumption and investment, is the real engine of the Chinese economy. We should not overestimate the role of reduced net exports in driving China's economic growth to keep macroeconomic regulation on course.

Domestic demand key to growth

It must be noted, however, that a reasonable assessment of the role of foreign demand does not mean we should downplay the role of exports or even China's opening-up policy, but that the slowdown in exports and narrowing trade surplus won't have a fatal impact on China's stable economic growth. If domestic consumption is pushed and a stable investment growth rate maintained, the Chinese economy can still expand by about 10 percent this year.

We should assess the role of foreign demand in China's economic growth from the following perspective.

First, foreign demand has always been the least important factor of the three main drivers of economic growth.

China has used net exports instead of total exports to assess the contribution of foreign demand to overall economic growth, which is the methodological approach used by other world economies.

In the 2001-04 period, net exports contributed only 0.1 to 0.7 of a percentage point annually on average to China's GDP growth - except in 2001, when net exports slumped 35 percent and reduced the country's economic growth. In 2005, 2006 and 2007, net exports contributed 2.5, 2.2 and 2.5 percentage points to GDP growth respectively.

Although its contribution has been rising in the last three years, it is still about 2 percentage points lower than that of consumption and investment.

Second, in terms of the proportion of net exports to the overall economic volume, although it has risen in recent years, it is far less than that of consumption or investment.

Since the mid-1990s, the proportion has remained at more than 2 percent. In the 2001-04 period, it ranged from 2.1 to 2.5 percent. In 2005 and 2006, it rose to 5.5 and 7.6 percent respectively and increased to 8.9 percent last year.

However, the proportion of consumption to economic volume was 49 percent last year, while that of investment was 42.1 percent - both much higher than that of net exports.

Third, statistics show that changes in net exports in the past have not had a serious impact on the economy.

Export growth is influenced by the domestic economy, but to a larger extent it's subject to many international factors. It is, therefore, often volatile, while the Chinese economy maintains a relatively stable growth track. That means net exports might not have a direct impact on the country's economic growth.

Last, although exports can influence economic growth in an indirect way, their role is less significant than imports, which can promote domestic consumption and investment.

It is obvious that foreign demand is not a decisive factor for the economy. If trade doesn't have a serious impact on consumption and investment, this year's expected export slowdown won't have much impact on overall economic growth.

We should not overstate the impact of slowing exports. The global economic slowdown will not lead to an economic crash landing in China, but rather will cool off the economy, which is what the country needs.

Therefore, authorities should not rush to ease China's preset tightening policy for this year, even though decreasing foreign demand may reduce China's economic growth to about 10 percent, which is more reasonable and conducive to an economic soft landing and in line with the policy target.

We know that domestic demand is the ultimate engine of the Chinese economy.

Domestic demand key to growth

We must adjust our economic policies to encourage consumption while properly controlling excessive investment growth to prevent inflation from worsening.

If consumption cannot grow continually, investment growth will lead to overcapacity and declining corporate profits, which will affect the stability of economic growth.

Given the global economic uncertainties, expansion of domestic demand is of strategic importance. It is the ultimate solution to achieving sustainable and healthy economic growth.

Moreover, we should also expand imports to rebalance trade - a major strategy in the light of both domestic and international development.

The author is an economist with the National Bureau of Statistics

(China Daily 04/15/2008 page38)

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