In October, retail sales reached 1,171.8 billion yuan (US$171.54 billion), a year-on-year rise of 16.2 percent, and 0.7 percent up on September. In the first ten months of this year, retail sales rose 15.3 percent. Over 10 million cars were sold in the first ten months of the year. Auto sales rose 72.5 percent in October alone, and were up 37.7 percent over the whole period from January to October. Cars and household appliances are leading a surge in retail sales. So can we say that China's domestic demand is on a rising curve?

In my view we need to look deeper than the bald figures when looking at consumption patterns. First who is doing the consuming? Current consumption levels are partly the result of the government stimulus package. Promotion of household appliances in the countryside, consumption subsidies and goods paid for with public money, have all pushed consumption to a higher level. Secondly, what is being consumed? People can only consume so much food and clothing. Chinese traditional culture encourages frugality and only the rich and the young are willing to spend money on high-end consumer items to keep up with fashions and trends. Thirdly, are current consumption levels sustainable? Young people's purchases are often either heavily subsidized by their parents, or depend on them spending their entire salary before the end of the month. Their free-spending, job-hopping life-style suggests that, unlike European and American consumers, they will not, in the long term, be able to hold up the half of the sky previously propped up by overseas demand.

We should note that consumer spending accounts for 80 percent of Japan's GDP. But the ordinary Japanese consumer does not feel that increased domestic demand has brought any real improvement in their living conditions. On the contrary, many Japanese believed that their living standards have declined. Part of the increased demand is due to low efficiency and high costs in the Japanese consumer goods industry. Another factor to be borne in mind is that as Japan's population ages, an increasing portion of consumer spending is on the necessities required to sustain people in their old age rather than discretionary spending on luxury items.

So just by looking at increased consumption data, we cannot simply infer that China's domestic demand is increasing. The economy remains unbalanced. In fact, consumption is decreasing as a share of overall GDP. This can be explained by three factors:

Firstly, farmers want to spend but have no money. Urbanization and industrialization of the countryside will be the key to providing jobs and increasing their spending power. Secondly urban residents have become much richer over the past 30, but while they have the money, they remain unwilling to spend it. To encourage them to spend we need to build a much more robust social security system and welfare system. Thirdly, we cannot ignore the growing gap between the rich and the poor. Although the rich are a small minority they have enormous spending capacity and the desire to spend money. The problem is that domestic industry cannot satisfy their demand for luxury goods.

Westerners are often appalled by the wasteful spending on famous brand goods by Chinese nouveaux riches. But what is more important is that such spending neither brings profits to domestic business nor boosts employment at home. The problem is that the "idle rich" cannot find what they want in the products of Chinese industry and are forced to look abroad. How to stimulate domestic consumption by the rich is a huge challenge. But meeting it would be more effective than levying more taxes, inheritance tax for example, on them. Providing that the rich don't harm others with their purchases, boosting their consumption is an effective, indeed indispensable way to create jobs and achieve sustainable development of domestic industry.

We cannot rely on the recovery of the European and American markets. Without a favorable commercial environment and a new growth model, American and European financial institutions will not lend sufficiently to return to the boom times. And China's domestic demand cannot be boosted in the short term. If we rely on the consumption of necessities alone to sustain growth and jobs, the government will in the future be burdened with massive social costs and financial risks. Urbanization, Shanghai Expo follow-up projects, and revitalization of the consumer goods industry should be the main pillars of China's economic development. If we ignore the need for industrial restructuring, and the need to cultivate a domestic consumer goods market, a growth model that depends on big government and massive investment may turn out to be even more harmful than the export-oriented growth model of the past 10 years.

This article?is first published at dfdaily.com and translated by Zhang Ming'ai.