China Deepens Strategy of Domestic Demand Expansion in the Course of Reform and Opening-up

Use the expansion of domestic demand as a basic strategy to accelerate economic restructuring

Economic reshaping and structural adjustment have become an international trend amid the current global readjustment. As China's economy has become deeply integrated into the global economy, it is necessary to constantly enhance the level of China's open economy against the background of economic globalization, regional economic integration and trade liberalization. While fully accounting for both the domestic and international situations, we should accelerate the transition of the growth pattern and economic restructuring while continuing the process of economic opening up and widening.

Economic restructuring is the most critical part to expanding domestic demand and is strategically significant for China's economic and social development. First, stimulation of domestic demand was the radical measure to effectively deal with the international financial crisis. Over the past two years, despite the fact that the economy has been hit by the global financial crisis, there has been a turnaround due to the growth in domestic demand. Currently, China's export growth is slowing due to the lingering profound impact of the global financial crisis as well as the influence of the European sovereign debt crisis. It is predicted that international trade will continue to cool in 2012. In response to this, in order to maintain stable and relatively rapid economic growth, domestic demand should be allowed to play a greater role in fuelling economic growth. Second, expanding domestic demand is the basic requirement and primary task for shifting the economic growth mode. The adjustment and transformation of the demand structure is critical to both the economic restructuring and the transition of the growth mode. After more than three decades of implementing and fine-tuning the reform and opening-up policy, China has become the largest exporter in the world with a heavier dependence on exports than many other countries. As the issue of global trade protectionism has raised its ugly head, China's efforts to increase exports have met with more trade friction, barriers and obstacles, and fiercer international competition. The international experience underscores the fact that, whether for a developed or developing country, the growth of a large economy should be mainly powered by domestic demand. Only by relying on consumer spending can our economic development achieve continuing success. Third, stimulating domestic demand is the only method which can lead to success. With its huge population and vast territory, China is the world's largest developing country which is during the development period characterized by significantly strategic opportunities. A large market, ability to be flexible and the huge potential for consumer spending will play an enduring role in powering the economy. Therefore, we should unswervingly continue with the strategy of stimulating domestic demand, draw lessons from experience, establish and refine a long-term domestic demand-boosting mechanism to tackle current issues and gain leverage in development.

Urbanization has the greatest potential for boosting domestic demand. The promotion of a coordinated urban-rural development is a major source of domestic demand. China's urban population exceeded 50 percent of its total population in 2011, marking a historic change. However, as a whole, our country still trails developed countries, and even the world's average level in terms of urbanization. Related statistics show that the urbanization rate of developed countries has reached 80 percent, and some developing countries with similar average income levels to China topped 60 percent. China is experiencing exponential urban growth which will spur investment and consumption and play a significant role in expanding domestic demand. Foreign economists once predicted that China's urbanization and U.S. high technology would emerge as twin engines of the global economy in the 21st century. Related statistics show that urban residents spent 3.6 times more than rural dwellers in 2010, with the average annual consumption of urban and rural residents standing at 15,900 yuan (US$2,525) and 4,455 yuan (US$707) respectively. Based on those figures, it is estimated that every rural resident who becomes an urban dweller will increase consumption by more than 10,000 yuan (US$1,587). And each one percent increase in the urbanization rate in only one year will see more than 10 million rural residents absorbed into the cities. This will, in turn, translate into consumption totaling more than 100 billion yuan (US$15.9 billion) and correspondingly create more investment opportunities. China currently has 240 million rural workers, about 150 million of whom have left the countryside to seek jobs. However, there remains a massive untapped labor pool in the villages, leaving great potential for domestic demand as a result of urbanization. The urban-rural dual structure has remained fundamentally unchanged. However a new phenomenon has emerged in towns and cities, in which we see a dual structure which includes a disparity in the production and living conditions of urban residents and migrant workers and their dependents. We also see a disparity in the living conditions of those residing in historical squatter settlements and the majority of urban residents. This issue causes conflicts and difficulties; however it is also the source of our greatest potential. Stepping up efforts to abolish the "two-tier class system" will help rebalance urban-rural development, resolve social conflicts and unleash the untapped potential for domestic demand which will result from urbanization.

Urbanization should be advanced steadily on the basis of fully respecting the rights and expectations of farmers and strictly preserving arable land. The government should draw up mid and long-term plans as well as comprehensive policies and measures to steadily promote the process of urbanization. In conformity with the objective law of urban development, we should beef up urban planning and administration while taking into consideration each city's capacity. The government should also oversee population flow and industrial transfer and promote reasonable, coordinated, comprehensive and integrated development of cities and towns. The government should formulate and ensure the seamless implementation of policies and measures which encourage migrant workers to integrate into cities, while also ensuring that they are covered by, and have equal access to basic public services, including urban social security, health care, education and culture. The government should help them solve problems concerning employment, housing, health care and children's education. Qualification requirements should be relaxed for those rural migrant workers with stable jobs and housing to become permanent urban residents of mid-sized and small cities. The government should introduce regular investment and financing policies for city construction, further improve the land management system, introduce an integrated transport system in line with urban planning principles, and enhance the building of urban infrastructure, including public transportation, pollution prevention, and public utilities. The healthy development of the real estate market is a key issue which must be addressed during the course of China's urbanization. We should retain the tightening measures placed on the real estate market and consolidate the early fruits of macro control. We should press ahead with the construction of affordable, government-subsidized apartments while effectively increasing the supply of ordinary commercial residential housing. We should also accelerate the establishment of a long-term mechanism to ensure the stable and healthy development of the real estate market so as to facilitate the steady development of urbanization.

Promoting coordinated regional development constitutes another source of the growth of domestic demand. The government should push ahead with the overall strategy of regional development and the strategy of main functional regions. With the current shift of economic growth in eastern China, the government should increase support for the development of western China. It should invigorate the old industrial hubs in northeastern China and facilitate the rise of central China, particularly with regard to increasing aid to old revolutionary bases, areas inhabited by ethnic groups, as well as border and poverty-stricken regions. Regional development is closely related to urbanization. Less-developed regions lag behind in terms of growth, especially in urbanization. In areas which boast mature development conditions and large environmental capacity, the government should actively and steadily facilitate urbanization by reasonable allocation of resources, centralized layout of businesses and encouragement of intensive land usage to fire up new engines of growth and enhance the local capacity for self-sustained development. The government should tailor its regional, industrial and land policies to different regions and sectors, rather than adopting general and all-inclusive policies. On condition that energy conservation and environmental protection are seriously executed, high quality and safety are guaranteed with sound coordination among sectors, certain national key development zones in China's western region should be granted differential policies when developing region-specific industries.

The service sector has the greatest potential for contributing to the growth of domestic demand. China has, after years of effort, become a leading global manufacturer, with a plenty of industrial products leading the world in terms of output. The competitive edges of "Made in China" have been constantly sharpened and there is still plenty of room for future growth. Relatively speaking, the development of China's service industry still lags behind other sectors and has become a weak point in China's overall economic growth as it only accounts for a small portion of the national economy. Related statistics show that China's service industry accounted for 43.1 percent of China's GDP in 2010, which was not only well below developed countries' average level of about 70 percent, but also below mid-income countries' average level of about 53 percent. China's production-related and life-related service sectors enjoy a large market demand and have great growth potential. The service sector which, in the main, belongs to the real economy, can both create social wealth and increase national power. The service sector is capable of absorbing the largest number of new employees and is an important driving force behind scientific and technological innovation. Industrialization requires both the development of industries and the development of the service sector. The combination of industrial and service sectors will help enhance the quality and competiveness of industrial development. China's 12th Five-Year Plan has set a target of increasing the service sector's value-added output in GDP by 4 percentage points within five years. We should work hard in order to ensure that we hit the target.

Escalating the growth of the service industry is critical to adjusting the industrial structure. Effective measures should be taken to build a favorable environment for the growth of the service industry, both in terms of its size and quality. The government should promote the development of production-related service industries such as modern logistics, e-commerce and scientific research and design. It should also ensure that consumption-related services such as tourism, recreation, care of the elderly and domestic services receive a boost, and the development of small and mid-sized service companies gets support. Meanwhile, the government should actively promote the development of strategically significant new industries, as well as high-tech industries and advanced manufacturing industries. We should master core technologies in order to gain a competitive advantage, explore new markets, particularly with regard to attending to domestic demand, and accelerate the optimization and upgrading of industries.

It should be underlined that, during the course of industrialization and urbanization, agricultural modernization should also be promoted. Successfully tackling issues regarding farmers, the countryside and agriculture aids the task of stabilizing growth and taming inflation, as well as government efforts to boost domestic demand, adjust the economic structure and advance the process of urbanization. We should be tireless in promoting rural initiatives through such methods as enhancing policies to enrich and empower farmers, boosting agricultural scientific and technological innovation, and reinforcing rural infrastructure construction. Additionally, we should protect arable land to ensure there is sufficient land for planting grain, increase synthesis productivity of staple agricultural products, ensure food safety, promote stable agricultural development, and continuously increase farmers' incomes, as well as the overall development of rural areas.

Consumer demand is the ultimate demand. In terms of boosting domestic demand, it is crucial that we attach greater significance to expanding consumption, especially residents' consumption, in the course of boosting domestic demand. It is crucial due to the practical necessity of tackling the current challenges we face, and with regard to the ultimate goal of long-term development. Our country's economic growth has long been powered, in the main, by massive investment, with consumption at a low level. According to related statistics, China's consumption ratio was 47.4 percent in 2010, far below the United States' 87.7 percent, the European Union's 80.7 percent and Japan's 78.6 percent. China's figure also lagged behind the 67 percent achieved by mid-income countries. China has great, as yet untapped, potential for consumption. We must act to change the current reality where there are more ways to expand investment than to stimulate consumption. We should improve policies, including tax and credit incentives, so that they encourage rational consumption with a focus on improving the consumption environment, nurture new growth opportunities, and in particular, enhance residents' consumption power. To this end, we should deepen the reform of the income distribution system, make changes to national income distribution pattern in order to align the growth of residents' income with economic growth and align the growth of labor income with that of productivity. The reform will also increase the incomes of the low-incomers through multiple channels, and raise the proportion of mid-income families. During the course of primary income distribution, we should encourage job-seeking and self-employment and increase incomes sensibly. Meanwhile, we should give full reign to the role of redistribution in relieving the personal stresses of both job-seekers and self-employers by refining social security system complete with pension, health care and employment provisions, promoting equal access to basic public services and providing a safe, well-rounded social security network.

Stimulating consumption is the basis for maintaining stable and relatively rapid economic growth, and stabilizing investment is crucial to directly driving economic growth. China's experience, gained in the course of tackling the international financial crisis, has shown that correctly allocated investment can boost economic growth quickly, effectively and noticeably. In 2012, the central government's budgetary investment will mainly finance those projects which are already under construction to ensure both the completion of existing projects and the undertaking of work on key projects included in the national 12th Five-Year Plan. While maintaining a reasonable level of investment, the government should concentrate on streamlining its investment portfolio and enhancing the quality and efficiency of investments. A more effective relationship should be forged between investment and consumption. The government should play a more effective role in directing investment, and should also continue to increase assistance to rural initiatives, water conservation projects, less-developed areas, public initiatives, scientific and technological innovation, energy-saving and emission-cutting projects, and public infrastructure such as railways and highways. All of these will release the potential for domestic demand and allow for greater growth.

Expanding domestic demand and adjusting the economic structure require a balance between domestic development and opening-up. In the face of weak international demand, we should uphold our current stable foreign trade policy in order to maintain the stable growth of exports, promote the upgrading of our exports structure, and continuously seek new markets. At the same time, we should continue to strategically expand imports to enhance the overall quality of China's economic growth. This should specifically focus on imports of advanced technological equipment, key parts and essential energy and raw materials. With an eye on the global allocation of resources and key elements, and attaching equal importance to our "Bringing In" and "Going Out" strategies, we should intensify cooperation with regard to outbound investment which will, in turn lead to cooperation related to trade, technology and energy and resources, and proactively guard against overseas investment risks.

Ensuring that development begins and ends with the guaranteeing and improvement of people's wellbeing

People's wellbeing impacts on domestic demand, economic development and social equality. As an important and effective approach to promoting domestic demand, ensuring and improving people's wellbeing can help boost consumption and investment. China's per-capita GDP currently stands at US$5,000. Public demand for improved livelihoods and living standards continues to grow. The potential of related markets will be rapidly realized and tapped to boost domestic demand. Increasing investment in this field is thus an effective way to adjust the economic structure. It is also the natural consequence of transforming economic growth modes. To cope with new public demands and the realities of the current situation, we should put improving people's wellbeing high on the agenda of economic work, put related projects before other development projects and work ceaselessly to ensure that we meet our targets.

In order to implement major projects to improve public wellbeing, we should follow the principle of ensuring basic demands, expanding coverage and creating sustainable development. We should carefully consider all factors, focus on key issues and draw up plans according to specific local conditions. We should implement all measures in an active, carefully planned, prudent and pragmatic manner. We should gradually expand basic social security to more people and continue to improve the standard of this system in line with economic development.

Low-income housing projects are closely associated with people's livelihood and development. Accelerating the implementation and construction of these projects, a major decision taken by the central government, can produce several positive effects, such as improving people's lives, stabilizing housing prices, boosting domestic demand and stimulating development. Last year, despite various difficulties, all regions and departments concerned managed to begin the construction of 10 million low-income housing units, setting the pace for the 12th Five-Year Plan period (2011-2015), during which the aim is to build 36 million low-income housing units. In 2012, taking into account both the general objective and the special conditions of different regions, we plan to start building more than 7 million low-income housing units and complete basic construction work on 5 million units. The new task for this year, combined with last year's unfinished tasks, pose a great challenge to us in terms of large-scale construction, demand for high quality and huge investment demands. To meet this goal, the central government will earmark increased support for these projects when planning its spending and budgetary investment. Local governments should make extensive use of their bonds to facilitate these projects. Eligible local financing companies should be allowed to release enterprise bonds to raise funds, both for these projects and supplementary infrastructure projects. Land supplies for the projects should be planned separately and assigned directly to local governments by the central government. We must endeavor to accomplish this year's plan, provide sufficient financial and land resources, ensure that these projects start and finish on time, guarantee the quality of construction on the projects and ensure that distribution is open, fair and impartial.

The renovation of squatter settlements is a crucial element of the low-income housing projects. The majority of their dwellers lead hard lives, handicapped by low incomes and poor living conditions. The past few years have seen local governments make significant headway in the renovation of squatter settlements. However, through the expansion of these projects, we discovered that more buildings are in need of renovation than we had previously anticipated. This year, we should continue to regard renovation as a key component of our low-income housing projects. We should improve communication and coordination, improve related policies, draw up comprehensive plans and ensure that work is carried out in a methodical fashion.

Medical and health care reform is a great challenge worldwide. In China, such reform is a major part of our overall reforms and an important project to promote people's wellbeing and development. The three years since the beginning of the reforms have seen remarkable progress made in the implementation of five major reform tasks. The basic medical security system has become accessible to 95 percent of urban and rural residents. The price of essential medicines has dropped significantly. The reform has been a great success. The year 2012 will see us undertake the new task of deepening medical reforms. It is also a year in which we will tackle tough problems. As the reform progresses, we will face more challenges and expose more deep-rooted, systemic problems. Our next steps should be to carefully review past experience and approaches, hasten plans to deepen the reform during the 12th Five-Year Plan period, stick to the principle of safeguarding basic demands, enhancing grassroots construction and creating a sound mechanism, and speed up the implementation of various key projects. Concerning basic medical insurance, we should shift our focus from "expanding coverage" to "improving quality". In addition to promoting greater participation in such insurance schemes, we should further raise government subsidy standards and reimbursement rates, continue the reform of payment methods and improve both the urban and rural medical assistance systems and the supplementary medical insurance system. We should consolidate and improve the provision of essential medicine and also improve the pricing mechanism for essential medicines, while establishing a new mechanism to operate grassroots health care institutions. The reform of public hospitals should be carried out in a comprehensive fashion. We should focus on the trial reform of county-level hospitals and take effective measures to bring convenience and benefits to patients at major hospitals. We should also ensure a more efficient diagnostic process, create a new administrative system and mechanism and examine ways in which public hospitals can separate their government and public features, as well as their administration and business operations, medical and pharmaceutical services and profit and non-profit functions. We should also promote a structure featuring multiple hospital sponsorship and strive to satisfy people's demands for diversified medical and health care services.

During the implementation of the major projects concerning people's wellbeing, we should follow the requirements and instructions of the 12th Five-Year Plan and implement programs in areas such as employment, social security, education and culture. Adhering to the concepts of focusing on the people, running the government for the people and putting service first, we should adopt measures such as increasing government investment, improving policies and plans and creating new systems and mechanisms. We should also promote the equal provision of basic public services, and work to ensure that the public enjoy the benefits which will come from the development and reform.