The stronger-than-expected rebound of the Chinese economy has proved the power of investment as a key growth engine.
However, policymakers should keep in mind that there is a limit to such an investment-driven recovery. The emphasis should be more on a consumer-led recovery.
Almost single-handedly so far, an investment boom has put the country back on track to hit its growth target of 8 percent this year.
Latest statistics show that fixed asset investment soared by 33.5 percent year on year in the first six months, contributing 6.2 percentage points to the country's 7.1 percent headline real GDP growth for the first six months. In other words, investment accounted for about 90 percent of the growth while consumption and export together added only 0.9 percentage points.
Clearly, investment is playing an overwhelmingly important role in helping China to weather the global slump. At a moment when shrinking external demand has made export -- the long-term growth engine -- a drag on the economy, stronger investment growth has picked up the slack caused by fall in exports to developed economies. As a result, growth of the world's third largest economy rebounded.
The release of such inspiring growth figures last week has, as expected, brought an end to domestic debates on whether the Chinese economy would see a V-shaped recovery. But, at same time, the issue of sustainability has been raised, and appropriately so, by many people.
Some observers warned that turning off the tap of fixed-asset investment would risk undermining the ongoing recovery, which is yet to be consolidated. Others insisted that it is dangerous for policymakers to further increase liquidity supply regardless of looming asset bubbles to stoke the investment boom.
Both arguments have their merit.
Obviously, Chinese policymakers have to weigh the huge potential of investment as a growth engine against the difficulties of sustaining an investment-led recovery.
Yet, for a lasting recovery, attention should no longer be fixated on overuse of investment to counter the economic crisis. It is time to set in motion a consumer-led recovery.
Unlike many developed countries that are set to endure a classic consumer-led recession, China faces a great opportunity to boost domestic consumption into an increasingly important long-term growth engine.
Though a 15-percent increase in retail sales may not be as eye-catching as the one-third surge of fixed-asset investment in the first half year, it does represent a rise of 3.7 percentage points in the growth of real domestic consumption in spite of falling prices and a gloomy global economy. Continuous income growth must have contributed to a broadbased rise in consumer spending.
Real urban household disposable income expanded by 11.2 percent in the first half year while real rural household cash income rose 8.1 percent during the period.
More important, fiscal subsidies and tax cuts for purchases of home appliances and cars have not only saved many domestic producers but also caught most automakers unprepared. Pent-up demand for new cars has beat all forecasts to make China the world's largest car market so far this year.
What is the potential of Chinese consumers?
An interesting report by the US-based consulting firm McKinsey predicted that the number of wealthy Chinese consumers -- people in households earning more than US$36,500 annually, which gives them the spending power of a US household making roughly US$100,000 a year - will likely increase by 16 percent annually in five to seven years, despite the global downturn. And these wealthy Chinese households, numbered 1.6 million in 2008, represented only the top 1 percent of earners in China's cities.
Compared with the 1.3 billion Chinese population, this is just the tip of the iceberg.
But if the government can swiftly tilt fiscal policies more in favor of increasing household income and improving social infrastructure, domestic consumption can be made to serve as a new thrust to propel balanced and sustainable growth.
(China Daily July 20, 2009)
