Aiming at structural reform
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Another challenge that will possibly influence the growth of domestic demand is whether the country can take effective measures to increase people's willingness to consume and ease their concerns over spending. In his report, Hu repeatedly stressed the importance of reforming the housing market and healthcare system, improving the social security system, building consumption market credit and protecting the interests of consumers. How these are implemented will, to a large extent, decide the quality of public services and the promised taxation reforms from the central to local levels.
The third challenge comes from whether China can effectively reduce the widening gap between the rich and poor. The establishment of a sound income-redistribution system through taxation is essential to maintain economic growth and ensure social harmony as long as measures are taken to prevent capital outflow.
The government's ongoing efforts to support the development of culture are aimed at creating attractive consumption channels for higher-income groups. The absence of such consumption channels will prompt high-income groups to choose overseas destinations for their spending. This in turn will lead other countries to think that people in China are already in the stage of luxury consumption. Such an impression will cause foreign decision-makers to ignore China's national conditions and development stage and choose to exert pressures on the country to open its whole domestic market and raise the value of its currency. All these will plunge China's economy into more unstable situations.
A lack of suitable consumption channels will prompt high-income groups to reserve their wealth instead of spending, which will result in fluidity excess within the banking system and fuel bubbles in the capital and real estate markets.
At a time when China's economy is still in a period of transformation and domestic enterprises still fail to meet the consumption tastes of wealthy people, the country should encourage domestic enterprises to produce more good-quality but cheap products for the overwhelming majority of less wealthy people. As a responsible economic power, China should welcome foreign manufacturers to provide some high value-added products and services for the domestic high-income population.
The author is a vice-dean and a professor at the School of Economics in Fudan University, in Shanghai.
