HE JUNCHANG BOOSTING RURAL SALES: A salesperson at a department store in Shunyi District, Beijing, introduces washing machines to customers 2011 (HE JUNCHANG)

First, continuously increasing incomes will provide powerful support for the growth of consumption.

Second, when maintaining a sustainable fiscal budget, China's basic public service mechanism will be expanded in 2011, and the standard of basic public service will be increased. This will in turn spur people's consumption capabilities and improve consumption quality.

Third, the improved logistics mechanism has perfected the consumption environment, which is beneficiary to increase consumption and improve consumption quality in the long term.

However, unfavorable factors also exist. "Uncertain price trends may be an important factor influencing short-term consumption," Wang said.

According to Wang, affected by extreme climate and price fluctuations on the international market, prices of grain and other basic farm produce in China increased during the first nine months of 2010. Price trends of basic bulk farm produce such as grain and cotton are still uncertain, and such uncertainty will cause inflationary expectations. This will affect the consumption situation for some time.

The Chinese real estate market, Wang said, will also be an important uncertainty affecting the consumption trend. According to present figures, macro-control policies have achieved some results, but the final result is still uncertain, and the changes in supply-demand relations in the short term will impose great effect on the market expectations.

The uncertainties of the external environment will definitely have some influences on the domestic consumption. Wang said if the external environment deteriorates, the Chinese economy will inevitably be encumbered, which will seriously affect consumption.

Also, most of the policies to stimulate consumption issued by the Chinese Government after the financial crisis will still be implemented in 2011. Some policies, for example, subsidies for rural auto buyers and the auto replacement project, have expired. Whether these policies will be renewed has yet to be decided by relevant government departments.

Wang thinks the government should appropriately extend the period for these policies for at least one year.

Suggestions

Chen Guangjin, Deputy Director of the CASS Institute of Sociology, said the key point of expanding domestic demand is to make consumption demand the main driver of economic growth. Achieving this will require higher incomes and social security.

However, although the income of urban and rural residents will increase in 2011, the income gap among different classes and groups is expanding. "The widening gap brings some serious problems, such as differentiated consumption between urban and rural areas and between different groups," Chen said.

According to Chen, people with medium-high and high incomes mainly drive up sales of luxury brands, while people with middle and low incomes mainly drive up basic consumption. Increasing the consumption capabilities of the latter group relies on three factors—increasing incomes, improving social security and stabilizing prices. Since the consumption capability is limited, if expenditures in health care and housing are too high, people will inevitably reduce basic consumption and non-essential spending.

Coping with this problem includes granting subsidies to low-income groups, increasing salaries of employees and raising the minimum wage, Chen said.

But increasing incomes is not the most effective way of stimulating consumption. The government should first eliminate uncertain factors that common people may worry about.

The biggest problem is that social security does not cover enough people and government input is inadequate. Chen said the government should focus on improving people's livelihood, such as reducing people's burden on education, pensions and health care spending—major reasons that deter Chinese people from spending.

Liu Yuanchun, Deputy Director of the School of Economics at the Renmin University of China, said besides increasing incomes, the government should also carry out a series of supporting reforms to boost consumption. More efforts are needed to reform the income distribution and salary formation mechanisms and the social welfare system.