New Deal to Boost Consumption

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  China is working toward expanding consumption at home. The State Council on September 10 issued the 12th Five-Year Development Plan for Domestic Trade (2011-15), estimating that by 2015 the country’s retail sales of consumer goods will reach 32 trillion yuan ($5.06 trillion), with an annual average growth rate of 15 percent.
  In 2011, China’s retail sales of consumer goods stood at 15.4 trillion yuan ($2.43 trillion) and by 2015 domestic consumption could double.
  The national plan is the first of its kind dedicated to increasing domestic consumption in a country that has largely relied on consumers in developed nations to fuel its growing economy. Shen Danyang, spokesman of the Ministry of Commerce (MOFCOM), said the plan is significant in terms of moving China toward rapid development of its domestic trade, improving people’s livelihood and guiding production.
  Since the 2008 global financial crisis, China has seen less demand for its exports. Exploiting the domestic market is seen as a key to maintaining economic growth.
  The Chinese Government hopes to see during the five-year period a complete rural market network, improvements in logistics infrastructure and an expansion of chain supermarkets to cover more villages. Furthermore, it hopes for a better distribution of urban commercial outlets, an enhancement of comprehensive service functions and better trade development coordination between urban and rural areas.
  Regarding its logistics industry, the government hopes the sales volume of chain retailers will account for more than 20 percent of the country’s total retail sales of consumer goods. The transaction volume of e-commerce is expected to grow at an annual average rate of 30 percent. Finally, there will be some competitive logistics enterprises.
  In the meantime, the market should be more capable of preventing and handling abnormal market fluctuations. The laws, standards and the credit system of the domestic trade sector will further improve and the market order will strengthen. The government also says it will improve product quality and safety.
  
  Conducive to demand
  “Issuance of the plan shows that one of the country’s future economic growth points is to promote consumption, and the market is optimistic about expansion of consumption,” said Li Gang, a researcher of macroeconomic policies at China Securities Co. Ltd. The policy will bring new development opportunities to various industries, including retail, logistics and e-commerce.
  Li said the plan proposes to gradually relax the restraint in market access to monopolized industries, deepen logistics reform of crude oil, refined oil, salt and medicine, improve the logistics system and management mechanism of important commodities and en- courage private investors to enter the logistics sector.
  According to MOFCOM figures, the number of privately owned commercial enterprises accounts for 93 percent of the total number of commercial businesses, which are playing an increasingly significant role in stimulating consumption and improving people’s livelihood.
  The plan is imperative to fuel economic growth and extend China’s economic cycles, said Chen Wenling, Director of the Department of General Affairs of the Research Office of the State Council, who took part in discussion on the plan.
  The plan is the latest in a series of initiatives aimed at stabilizing economic growth. In April, the first round of stimulus was directed at infrastructure investment and large projects. The second round of stimulus began in June and July, when local governments across the country launched financial reform schemes and regional development plans, also involving massive investment. This third round of stimulus focuses on expanding consumption and stabilizing exports and is the most farreaching.
  Detailed policies expected
  “The government should correspondingly raise personal incomes and ease social security difficulties in education and health care. Without these detailed policies, the government’s goal would be hard to achieve,” said Zhang Mingsheng, a Beijing resident.
  Zhang, a press editor, earns 6,000 yuan($950) a month, a fairly high income in Beijing. But he still puts half his salary in the bank, even when interest rates have been lower than the rate of inflation during the last two years.
  Each year Zhang travels once with his family within China, which is his highest expenditure for the year, and the family eats out once or twice a month. He said he won’t dare spend his money on big purchase items, although he would like to replace his Lenovo computer for an iMac, change his Volkswagen Bora for a BMW and bring his family to the Great Lakes in North America and the Triumphal Arch of France. Zhang said his savings will be used for his son’s education and for other urgent needs first.
  In China, many people live the same life as Zhang and have similar ideas in spending.
  “To promote domestic consumption, an important problem is whether personal income can be raised,” said Zhao Xianwei, a macroeconomic researcher at Galaxy Futures Co. Ltd. “The government would first need to raise residents’ income remarkably.”
  Zhao Ping, Deputy Director of the Department of Consumption Economy Studies of Chinese Academy of International Trade and Economic Cooperation, said the new government initiative would accelerate plans to increase residents’ income, improve social security and readjust the consumption tax.
  “China is likely to redouble the efforts in stimulating consumption,” Zhao said. “The country may readjust the taxation of items and the structure of the consumption tax, such as changing the tax rates on some commodities such as automobiles, cosmetics and jewelry. To some consumer packaged goods that used to be luxuries, the government may lower the tax rate or even exempt those items from a consumption tax.”
  Zhao said for some government-supported key products or services, the country may consider adopting a way of collecting consumption tax and then refunding it. If consumers buy these products or services with consumption loans, the government may consider expanding consumption by offering discount loans.
  If the social safety net is completed, consumption will grow substantially, which could pick up the slack from lower consumption in developed markets, said Zhao.
  
  
  Problems to be tackled
  Zhao Xianwei believes that in order to accomplish the goals set out in the plan, it must do three things.
  The first is to balance development in different regional markets when promoting domestic trade, which has been a nagging problem confronting China since its opening up to the world over 30 years ago. Since then, China’s economic and social development has been unbalanced, with growing development in the eastern regions and urban areas but slower development in the western regions and rural areas. Consumption patterns and inter-regional trade are also unbalanced.
  “For better development of domestic trade in the future, China needs to coordinate development among different regions,” Zhao said.
  The second problem is logistics. In order to balance development among different regions, China must improve its entire logistics network in order to cut costs.
  The third is to find a way to ensure stable prices at the domestic market. Amid fluctuations of prices for bulk commodities on the international market, it is difficult to stabilize domestic prices through macro-control measures. “If there is a stable mechanism on our consumption market, we can, together with the financial market, influence the prices of bulk commodities,” Zhao said. “This is what should and can be solved in the future.”
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