After more than 25 years of economic growth driven by exports and fixed-asset investment, China is turning towards consumption to sustain the boom.

Fostering domestic spending and reducing the heavy reliance on exports and investment has been placed on top of the government agenda this year.

Retail sales in 2005 reached US$827 billion, up 12.9 percent from 2004, official data shows the biggest growth since 1997.

This year, retail sales are forecast to rise 12.5 percent in the first half, according to a Ministry of Commerce survey released last month.

"GDP growth in the past was spectacular but is not sustainable if consumption keeps dormant and is not enough to absorb the increased production," said Lin Yueqin, an economics researcher with the Chinese Academy of Social Sciences.

"In particular, relying too much on investment and trade wastes resources and creates trade rifts," he said.

China's foreign trade increased 23.2 percent last year to US$1.42 trillion, generating a record US$101.9-billion surplus.

But at the same time, low-priced Chinese exports became the world's top target of anti-dumping charges and other restrictive trade measures.

China also consumed about 50 percent of the world's cement and 40 percent of steel amid an infrastructure-building and real-estate boom. Fixed-asset investment jumped 25.7 percent in 2005, largely unchanged from the 25.8 percent growth in 2004.

"Given high international oil prices and a possible slowdown in the global economy as well the government's effort to rein in investment, domestic consumption will play a bigger role in the economy," said Lin.

"Noticeably, the government has moved to shift the economy to a more consumption-oriented path and the current climate is favorable to the pickup of consumption," he said.

The government announced a series of policies last year to raise private income, including scrapping agriculture tax, raising thresholds on income tax, increasing minimum wages and civil servants' salaries, and providing free basic education in rural areas.

Urban residents' per capita disposable income was up 9.6 percent to 10,493 yuan (US$1,295) last year, according to the National Bureau of Statistics (NBS). Rural residents' net income per capita improved 6.2 percent to 3,255 yuan (US$402) over the same period.

The government has announced that it would further encourage private spending this year, especially by farmers. It also promised to foster new consumption themes and improve market regulation.

The retail market seems to be in line with the government's intentions. According to a recent Ministry of Commerce survey of 600 categories of consumer goods, 170 are forecast to have balanced supply and demand in the first half of this year, whereas the remaining 430, or 72 percent, will see overcapacity. Nothing will be in short supply.

"Reasonable overcapacity is helpful to stimulate price competition, promote upgrading of products and therefore encourage spending," said Qi Jingmei, a senior economist with the State Information Center.

Prices of most retail goods would remain stable in the first half of 2006, but food items and jewellery would probably register rises, according to the survey.

It noted a trend of moderate price drops in major consumer goods such as electrical appliances and automobiles, saying this would prod consumers to look for higher-end products.

Despite an obvious downward pressure on retail prices, it is the consensus of economists that deflation is not imminent.

"The economy is still on a fast track, the demand for production materials is robust, and oil prices remain high, which will combine to offset flat retail prices," said Qi.

She said the consumer price index (CPI) is likely to rise moderately amid stable GDP growth.

A recent report by the Chinese Academy of Sciences projected a similar outlook, saying China's CPI would rise 1.97 percent this year, compared to 1.8 percent in 2005 and 3.9 percent in 2004.

Assistant Minister of Commerce Huang Hai predicted last month that China's retail sales would top 10 trillion yuan (US$1.2 trillion) in 2010 with an average annual growth of 11 percent from now.

But making consumption as powerful an engine of growth as investment and exports may not be easy. There are doubts whether the potential purchasing power in China represented by over 14 trillion yuan (US$1.7 trillion) in bank deposits ?can be fully tapped in the short term.

"The current 12-percent retail-sales growth is not slow, but further acceleration may prove to be difficult because there are no new consumption themes to inspire buyers to go out and spend, said Tao Dong, chief regional economist at Credit Suisse.

Cui Jianhua, vice dean of Peking University's School of Economics, said the potential demand would not transfer into real spending until private incomes grow further and the social security network is improved.

China had more than 100 million people living in poverty at the end of 2004 and average per capita income ranked 129th in the world at about US$1,500, behind Egypt and Iran, according to official statistics.

"The costs of education, health care and pensions add to citizens feelings of uncertainty and make many tighten their purse strings for rainy days, said Cui.

The government is taking steps to improve the welfare system and, particularly, the livelihood of the 750 million rural residents who are seen as the mainstay in expanding domestic demand.

"It takes time before the people get better off and the welfare infrastructure is in place, said Lin of CASS.

"It's not difficult to have a big consumption volume considering the number of people we have, he said." But to transfer the economy into a consumption-oriented one would need more time and efforts.

(China Daily March 16, 2006)