China’s economy Fueled by Domestic Demand and Foreign trade in 2012

IN 2012, the effects of the world financial crisis are still lingering. China’s economic rise continues to draw worldwide attention; and the appreciation of the RMB, the country’s large stockpiles of foreign reserves and its export strength are all perennial topics of debate among media commentators. With many countries around the world still negotiating the rapids of economic recovery, will China avoid the tumult and chart its own smooth course of growth over the next couple of years?

Domestic Demand Drives Growth

“The Chinese government pursued domestic demand-boosting policies as early as 1997 during the Asian financial crisis,”said Liu He, deputy director of China’s Central Leadership Office of Financial and Economic Affairs. “During the crisis, a large amount of capital flight took place from China to the U.S. While domestic demand-boosting policies were pursued to some success, the desire to attract foreign investment and ride the globalization wave meant that over the coming years, less attention was paid to domestic demand. As the global financial crisis was breaking out in 2008, international demand shrunk, and China was forced to focus on boosting domestic demand again,”Liu explains.

At the Fifth Session of 11th National People’s Congress (NPC) which opened on March 5, Premier Wen Jiabao said in a government work report that expanding domestic demand, particularly consumer demand, is essential to ensuring China’s steady and robust economic development for the long term, and is the priority of government work this year.

Jia Kang, a member of the CPPCC and director of the Research Institute for Fis- cal Science at the Ministry of Finance, pointed out: “While China has opened up its economy by relying heavily on foreign markets, the global financial crisis has taught us that we must pay more attention to expanding domestic demands, no matter what stage of the economic cycle we are in.”

Expanding consumption has been increasingly stressed in Chinese government work reports over the past few years. Work reports of 2009, 2010 and 2011 all laid out measures to boost domestic demand, as well as implement and improve policies to further encourage consumption. This year’s government work report promised to set up a permanent mechanism to boost consumption.

Since 2008 the Chinese government has implemented a slew of policies on a trial basis to stimulate domestic demand. They include providing subsidies for home appliance purchases in rural areas, cutting consumption taxes on cars with smaller engines, extending subsidies to cover more energy-efficient and environment-friendly products, raising thresholds for individual income tax brackets and improving the medical care system.

Statistics from China’s National Development and Reform Commission (CNDRC) show that about 220 million home appliances were sold to rural residents in 2011, with sales volumes exceeding RMB 500 billion. Consumption accounted for 51.6 percent of China’s economic growth in 2011, indicating that China has been successfully rebalancing its economy to rely more on domestic demand.

Zhang Ping, director of the CNDRC, pointed out that to expand domestic demand, the government must raise people’s incomes as well as encourage them to spend more. To this end, the government should expand employment opportunities, raise procurement prices for farm products, increase the minimum wage and set up a mechanism to ensure increases in average wages. A sound social security system should also be established, Zhang says. The government should further improve infrastructure to foster the convenient flow of goods from factories to consumers, as well as develop new forms of consumption such as online shopping. It should also continue to enhance supervision over the market to prevent fraudulent practices and eliminate counterfeiting and shoddy products.

Nowadays, many countries hope to boost their lackluster economies by expanding domestic demand. How to boost domestic demand has become a burning question in the minds of policymakers around the world.

Many Chinese scholars have discussed the solutions: promoting structural tax cuts and increasing the disposable incomes of people in the low- and middleincome brackets, improving the social security system that covers both urban and rural residents, ensuring the even distribution of educational resources, and lowering import duties on luxury goods.

Foreign Trade stokes China’s Economy

Of course, in focusing on domestic demand China should not overlook international markets. The country’s 2012 government work report also stressed China should endeavor to promote the quality and level of its opening up to maintain steady development in its foreign trade.

Foreign trade creates a win-win situation that benefits China and its trading partners. This comes from two aspects: firstly, China continues to meet its foreign partners’ demands for China-made products; and secondly, free trade will bring Chinese enterprises many valuable opportunities to enjoy advanced technologies brought in from overseas.

Statistics from the General Administration of Customs indicated China’s 2011 foreign trade volume topped US $3.642 trillion, up 22.5 percent year on year, setting a new record. From this total, exports amounted to US $1.899 trillion, seeing a year-on-year increase of 20.3 percent, and imports were valued at US $1.743 trillion, an increase of 24.9 percent. The country’s trade surplus dropped by US $26.37 billion to US $155.14 billion, falling 14.5 percent year- on-year.

“The main cause leading to the drastic drop in China’s trade surplus is the current unfavorable environment for foreign trade. The impact of the global financial crisis is still being felt around the world and in some places the situation is even worsening. The European debt crisis, for example, has greatly dampened European consumption. In China, various factors are driving up domestic production costs,”said Minister of Commerce Chen Deming.

“We hope European countries are able to encourage employment and promote economic growth while cutting budgets,”Chen said. Recently, China’s trade with European countries and Chinese enterprises’ investment, mergers and acquisitions in those countries have seen sharp uptick. These activities all directly create jobs in Europe. “The EU is China’s largest trading partner, and also the biggest technology exporter to China. Prosperity and growth for European countries is closely related to China’s development. To help European countries out of their current predicament is to help ourselves,” Chen added.

CPPCC members and NPC delegates said that although world markets are grim, China has no desire to adopt trade protectionist measures. “Trade protectionism only worsens global trade imbalances and hampers recovery,” said Ma Xiuhong, a CPPCC member and former vice minister of the Ministry of Commerce.

opening up While Zooming in

The Chinese government has taken the improvement of the local investment environment as a key to absorbing foreign investment. Since Deng Xiaoping’s tour of southern China in 1992, during which he made famous remarks on accelerating the nation’s opening-up and reform, China’s environment for foreign investment has been constantly improving. Last year the value of received foreign direct invest- ment (FDI) increased by 9.7 percent to US$116 billion, making China the top FDI recipient among developing countries.

A better environment was created for foreign investment in modern agriculture, strategic emerging industries, modern services and high-end manufacturing. Sectoral distribution of FDI has become more rational as FDI in services increased significantly faster than the average rate across all sectors. The absolute value of FDI in services is now bigger than FDI in manufacturing. FDI also became more widely dispersed geographically. A number of provincial-level development zones in China’s central and western regions, such as the Korla Zone in Xinjiang Uygur Autonomous Region, were elevated to national development zones.

Stronger support was also channeled into infrastructure construction in national development zones and border cooperation zones last year.

Significantly for sustainable development, FDI was to be found across a broader range of business activities. Cooperation in eco industries accelerated as the China-Germany Eco-park in Qingdao was opened and the number of joint projects with other countries, including Japan, Switzerland and Austria, saw steady growth.

“In the coming five years, China’s industrialization and modernization will continue to gain pace. Energy saving technologies, emission reduction schemes and green development will bring more development opportunities to China’s economy. The development of civil causes and culture industries will also instill new blood into the economy. All of this will create more opportunities for investors, including foreign ones,” Ma said.

Meanwhile, thanks to improved government planning and policy support,“going global” efforts by domestic businesses have gained new impetus. Construction is moving ahead on 16 overseas trade and economic cooperation zones. These have already become the preferred locations for Chinese companies investing abroad. In 2011, China’s non-financial outward FDI amounted to US $60.1 billion, and this total is set to increase significantly in years to come.

“The nation is right now quickening the steps it has taken in making outbound investments,” Premier Wen said at the 2011 session of the NPC. “The government will guide companies in making expedi- ent investments, largely through mergers and acquisitions, in energy, raw materials, agriculture, service and infrastructure industries.”

This year marked the first occasion on which the Premier elaborated on industries that are to be targets for Chinese outbound direct investment. Global investments by Chinese businesses not only create new growth opportunities for their shareholders and China but also create jobs and revenues in host countries.

“Expanding domestic demand and opening-up are closely connected and part of an integral whole,” said Zhang Xiaoji, director of the Foreign Economy Research Department of the Development Research Center of the State Council. “The strategy of expanding domestic consumption and tapping the domestic market doesn’t negate China’s opening-up. On the contrary, the new policy heralds a new era in opening-up. In the last 30 years, China has cultivated a massive domestic market with huge potential. This market appeals to foreign capital, which can help alleviate China’s dependence on exports for growth. Expansion of domestic demand is also an effective way to move domestic production away from low valueadded industries and enable China to begin exporting higher quality goods to the world,” Zhang said.

He stressed that expanding domestic demand is not a denial of expansion into overseas markets. On the contrary, China still needs to expand further into overseas markets, the key enabler of which is to cultivate a high quality global sales network. In recent years, more people have become aware of the fact that certain multinational corporations purchase Chinese products at low prices and sell them in overseas market at incredible mark-ups. Chinese manufacturers receive a comparative pittance. The reason behind this skewed distribution of profits actually lies in China’s lack of a global marketing network. Contemporary global production and business operations rely on such a sales network to enhance countries’ global presence. The key to expanding and upgrading China’s “opening-up” imperative lies in the establishment of an international production and operation network, which will ensure China’s advantages in manufacturing are transformed into China’s profits on exports,” Zhang said.

No country can prosper by shutting itself off from the world, but nor can a country make good by ignoring its own people. In short, expanding domestic demand will be crucial to ensuring prosperous economic lives for the Chinese people. In the years to come, “opening up while looking in” is set to be a new paradigm.