CAI FANG is vice president of the Chinese Academy of Social Sciences.
An automobile consumer exhibition is held at a business center on Zhongnan Road in Yichang, Hubei Province on June 12, 2020.
At the current stage, China faces multiple challenges at home and abroad. Domestically, driving forces for the economy from the supply side are abating. Internationally, anti-globalization sentiment, global economic slowdown, and ongoing trade spat provoked by the United States are aggravating domestic pressure.
The ravaging COVID-19 epidemic is not only a danger to people’s health and livelihood, but also puts a strain on economic activities.
At present, through arduous efforts made by people in the whole country and implementation of effective prevention and control measures, the epidemic in China has been brought under control. Meanwhile, the Chinese government has issued a slew of policy initiatives to support the resumption of work and production, and assist small and medium-sized enterprises to get through the difficulties and resume economic activities.
China is expected to double both its GDP and per-capita income of urban and rural residents as compared with 2010, and to lift all the rural poor out of poverty by the end of 2020. The outbreak of the COVID-19 epidemic complicated the situation. Since economic progress in the first few months of 2020 is significantly lower than that in the same period of previous years, great effort is needed to recover the losses and achieve the best possible annual results.
Meanwhile, the epidemic adversely impacted China’s economy from three aspects: the demand side, supply side, and global market. Demands and market supplies shrank amid the epidemic when many shopping centers and factories were closed. Internationally, while in the grip of the pandemic, the flow of production factors including goods and human resources came to a halt, putting pressure on China’s domestic economy. Encountering this special challenge, China must give full play to its gigantic domestic market and introduce more measures to tap into the potential of consumer demands.
Shored up by a Huge Market
China’s economy is transitioning from the high-speed growth stage to a high-quality development stage. Instead of relying on heavy input of production factors, external demands, and investments, China needs to improve productivity and boost domestic consumption to maintain a sustained and healthy economic development.
China has unique advantages in kick-starting domestic demands, especially consumer demands. With a large market, China’s economic fundamentals are strong. The huge market potential will also help the country to cushion the adverse impacts brought on by the epidemic.
From the perspective of international comparison, China has a particularly large consumer market. According to statistics from the World Bank, the total final consumption of China reached US $7.3 trillion in 2018, accounting for around 11.6 percent of the global total. According to the standard set by the World Bank, China has been in the rank of upper middle-income countries since 2010, and China’s final consumption accounts for about 46.9 percent of countries of the bracket in the aggregate. Although there is still a big gap between China and developed countries in terms of per-capita income and per-capita consumption, the country’s final total consumption is huge, approximately equivalent to 71.8 percent of the total level of euro zone countries thanks to China’s huge population size and economic scale.
The scale of domestic consumption is still on the rise, and the momentum for the growth is robust. From 2008 to 2018, China’s total final consumption grew at an average annual rate of 8.5 percent, far higher than the world average of 2.3 percent, as well as the averages of other upper middle-income countries and of euro zone countries. The consumption expansion had outstripped its GDP growth over the past decade. The ratio of final consumption growth rate to GDP growth rate increased from 0.903 in 1998 to 1.072 in 2018. Such an encouraging trend is expected to continue.
The above-mentioned facts also indicate that factors contributing to China’s economic growth have changed. China’s economy has long been driven by three factors – net exports, investment, and consumption. Consumption is contributing more and more to GDP growth. In 2018, over 76 percent of GDP growth was propelled by consumption. Spending by urban and rural residents accounted for around 70 percent of the total consumption, a significant increase from 2008.
Exploiting the Potential of Domestic Demand
The tertiary industry and household consumption, the main contributing factors to China’s economic growth, are also the areas most seriously affected by the epidemic. During and after the pandemic, reopening the service sector and spurring household consumption can be the focus of efforts to restore economic activities, stabilize employment, and ensure people’s livelihood.
Consumption demands in the following areas are expected to be released.
Usually, after the restraints on normal consumption are removed, consumers tend to splurge on goods and services they were not likely to spend money on during normal days. For example, consumers may hold back their desires to buy some home appliances during the epidemic. Then after the restraints are lifted, they were very likely to pay for more expensive ones from brick-and-mortar stores. Some recent surveys supported such a trend particularly among young consumers.
The second is new service models in sectors that bore the brunt of the epidemic. For example, tourist businesses, theaters, and services providers depending on public gatherings are rolling out new service models in accordance with epidemic control measures. Such new models are expected to create new growth momentums for these sectors seriously affected by the epidemic.
The third area is about new consumption demands fostered during the epidemic. People’s demands for quality and healthy life have been highlighted by the epidemic. Health care products, sports and fitness-related services, home decoration, and cars among other products and services are expected to sell briskly.
The government should help businesses unleash potentials in these areas. At the demand end, subsidies should be offered to low-income families and those hit hard by the epidemic to increase their consumption capabilities and boost their confidence. And at the supply end, the government should also help businesses in the service sector, particularly small and medium-sized companies, to get through the difficult period of time. Businesses in the service sector should be encouraged to experiment on new business models revolving around e-commerce, and services for consumers within a certain community, in a bid to translate potential demands into spending activities. These are just what the Chinese government has been working on.
CAI FANG is vice president of the Chinese Academy of Social Sciences.