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Revitalization Plan for Industries
Special> Revitalization Plan for Industries
UPDATED: March 3, 2009 NO. 9 MAR. 5, 2009
Why China Is Confident
Can China stop the downward tendency of economic growth and reach an economic soft landing?

China's urbanization process is still going on, so that there will not be capital surpluses in China. At present, more than 20 Chinese cities are building subway and light rail systems, showing that in cities, multilevel transportation services and other infrastructure are inadequate, and meanwhile the demand for housing is still urgent.

In short, the difference between China and developed countries is that we are facing an urbanization process that is emerging and vigorous, while developed countries are facing urbanization that is over-saturated, aging and declining. The vast room for investment and the continuously increasing marginal effect of investment in cities are important sources of China's confidence.

Upgrading the consumption structure

People have reached a consensus that expanding domestic demand is the primary way for China to take the lead in getting out of the shadow of the economic crisis. Can China realize its goal of expanding domestic demand?

First, we should note that the key way to expand consumption demand lies not in whether people are willing to spend their money in hand, but how they will dispose of the money they will earn in the future, especially the increases in their future income-not simply spending more money based on the old consumption structure, but upgrading the consumption structure by expanding the means of consumption and forming new lifestyles and new consumption demand when their income grows.

International experience shows that during the process of industrialization and modernization, there are four stages for changes in consumption structure: first, the stage of meeting basic demands, when people are spending most of their money on basic daily commodities; second, the stage of improving their quality of life, when home appliances become necessities; third, the stage of meeting demands after getting rich, when houses and cars become the new demands; and fourth, the stage of development-oriented demands such as travel, education, health care and property management.

Compared with developed countries, China has advantages because its consumption structure is in a period of fast upgrading. At present, the consumption structure of urban residents has passed the first and second stages and is in the third and fourth stages. For example, the number of domestic trips taken by Chinese citizens rose from 744 million in 2000 to 1.61 billion in 2007, up 116.4 percent. Their total travel expenses rose from 317.55 billion yuan ($46.43 billion) in 2000 to 777.06 billion yuan ($113.61 billion) in 2007, up 144.7 percent.

Besides the huge potential for consumption demand, China also has another advantage: the potential expressed by Engel's coefficient.

Engel's coefficient basically tells how much people spend on food out of their total income. The Engel's coefficient for China's urban residents stood at 57.5 percent, 54.2 percent, 39.4 percent and 36.3 percent in 1978, 1990, 2000 and 2007, respectively. In most developed countries, the Engel's coefficient is lower than 30 percent. In an economic sense, the consumption structures in these countries have been stable and fluctuations of social consumption levels can just rely on the business climate in the short term. On the contrary, the Engel's coefficient in China is in a period of obvious change. In other words, the measures to stimulate consumption by the U.S. Government can only produce a short-term expansion in consumption, but China's advantage is that its regulating measures to "ensure growth" have vast room to form new consumption points.

Therefore, we can sum up the difference between China and developed countries: The problem China faces is how to make people spend the money they must spend and guide society to move beyond the critical point in consumption structure upgrading. The problem developed countries face is how to repay the "debt" created by over-consumption and help consumers reduce the risks brought about by over-consumption.

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