Consumption demand, as a key engine propelling economic growth, should be stimulated with proper policies.

As China enters a new phase of industrialization, investment demand, the pillar of economic progress for now, will see a diminishing role. At the same time, consumption will take its place and become a steady contributor to continued growth.

However, domestic consumption is still not strong enough to hold its position in recent years.

China's gross domestic product (GDP) growth has slowed down since the mid 1990s. The average annul GDP growth between 1996 and 2003 was 8.1 percent, 2.1 percentage points lower than that between 1980 and 1995.

The major reason for this decrease is the sluggish growth of consumption.

The retail sales of consumer goods rose by 16.3 percent on average every year from 1980 to 1995 while the growth rate dropped to 9.1 percent from 1996 to 2003.

There are several factors behind the dormant consumption.

First of all, quick growth in urban consumption is difficult to sustain.

Urban residents witnessed dramatic improvement in their living standard over the past two decades. By 2002, on average, every 100 urban families owned 126 color TV sets, 93 washing machines and 87 refrigerators.

The ownership rate of durable consumer goods in Chinese cities is among the highest in the world. So the consumer goods growth is unlikely to see further growth in the near future.

Low-income urban residents, who have potential consumption demand, could become the source of new consumption.

However, including the unemployed, laid-off, retired and those working in companies with poor revenues, the urban low-income groups do not have enough purchasing power to transform their potential into real demand on the market.

As a matter of fact, China's 500 million urban residents account for only around 40 percent of the nation's population of 1.3 billion, while their consumption demand accounts for 65 percent.

Comparing those two proportions, it's obvious consumption growth driven by the urban population cannot maintain its momentum over the long run.

The majority of China's population, rural residents, are seeing widening gaps between themselves and urban residents in terms of income and consumption growth.

This is one of the most important factors behind lingering consumption rise.

Despite the government's painstaking efforts to improve farmers' incomes, the average income of rural residents remains mired in stagnation.

In 2003 the average annual net income for every rural resident was 2,622 yuan (US$315.9), which is roughly the same as the average annual income of urban residents in 1993.

With their income lagging 10 years behind, farmers' ownership of durable consumer goods is only comparable to that of the urban citizens in the 1980s.

Differences between urban and rural populations aside, government consumption grows so quickly that it has limited the sound growth of residents consumption.

"Government consumption" represents the costs paid by the government on public services provided to society free or at a low price.

Between 1980 and 1990 government consumption rose by 13 percent annually and private consumption grew by 14.6 percent, 1.6 percentage points higher.

Since the 1990s government consumption has accelerated its growth and reversed its position with private consumption.

The annual growth of government consumption from 1991 to 2002 was 16.3 percent while private consumption rose by only 14.8 percent.

Government consumption and private consumption usually stay at each end of a seesaw. With government consumption high up, private consumption will be somewhat pressed down.

Private consumption is supported by a large population, therefore, it has a much greater potential to promote total consumption growth.

So the quick growth in government consumption acts as an obstacle to the rise of the overall consumption demand in China.

As a whole, citizens of China have not fully enjoyed the benefits of the nation's impressive economic growth over the last two decades.

Consumption by the people has not advanced at the same pace as the economy. The per capita output growth exceeds the rise in per capita consumption, especially in less developed regions.

The country's GDP had a 9.5 percent annual growth on average between 1980 and 2002 and the per capita GDP grew by an average of 8.2 percent during the same period. But urban consumption and rural consumption stood at only 6.8 and 6.3 percent respectively at the same time.

These statistics indicate the fortune created by economic development is spent on further production or accumulation and the average person has not seen substantial improvement of life.

Based on this analysis, measures to stimulate consumption must be directed to eliminate the factors mentioned above.

First, urbanization must be promoted with utmost effort.

With their convenient living facilities, cities can generate consumption growth effectively. Only when urbanization is accelerated and more rural people become city dwellers can consumption really be geared up.

By 2003 the proportion of urban residents in the total population stood at around 40 percent. It will be ideal if this rate maintains growth of 1.5 to 2 percentage points annually for the next few years and reaches 10 percent by 2010.

With the urbanization rate going up 1 percentage point, more than 15 million rural residents could move into cities and towns. The consumption created in this process would amount to tens of millions yuan and boost the GDP growth by 1 to 2 percentage points.

Second, policies must be made to improve consumers' income.

With higher income, consumers will have stronger purchasing power and the measures stimulating consumption could hit home.

Besides increasing the revenues from low-income urban groups and rural residents, the authorities should also reform the tax system to protect the interests of low- and middle-income groups and narrow the income gap.

Third, a balance between government consumption and resident consumption should be achieved.

It is necessary to change the situation that sees government consumption growing much faster than resident consumption.

The government should increase its subsidies and aid to poverty-stricken groups and under-developed regions. In this way, the government grants the choice in consumption to those residents and increase their consumption.

The article is written by Qi Jingmei, a researcher with the State Information Center.

(China Daily June 4, 2004)