Consumers alone not the answer to economic growth

PUBLISHED : Monday, 06 March, 2006, 12:00am
UPDATED : Monday, 06 March, 2006, 12:00am

Hong Liang economist

While optimism is high on domestic consumption, that consumption alone will not be enough to sustain economic growth when exports eventually slow, Goldman Sachs China economist Hong Liang. Investment, more specifically company capital expenditure, has an important role in keeping up that momentum. The key is domestic demand, which comprises consumption and investment.

'To get domestic demand, you cannot have a major slowdown in investment because that's how jobs are created. Companies create jobs,' she said.

One of the problems in assessing the situation is that the data does not fully reflect what is happening.

Ms Liang thinks figures for exports and imports are the most reliable, followed by data on retail sales. She believes data on investment has been overestimated because property sales, and sometimes vehicle sales, are considered investment.

'In China, property is one category of goods that is very hard to define,' Ms Liang said. 'My personal view is if you look at the whole consumer demand side, including property ... China's consumer demand has been very strong in the past few years.'

Ms Liang believes several moves should be made to further stimulate domestic demand. First is appreciation of the yuan. She believes the undervalued currency effectively acts as a tax on consumers by making imports more expensive. Measures to slow the booming economy, such as tightening of credit, and restrictions in the steel, motor vehicle and property sectors, should be lifted, she said.

In particular, the government has cut back property supply to slow price inflation, but she said has the opposite effect 'When you want the price to come down, you increase the supply.'

More spending on education and health in rural areas has helped and should be continued.

Lastly, taxes for domestic companies should come down in line with those applied to foreign companies.