Insufficient domestic demand in China

2006-09-03 - chong

Despite incredibly high growth arate, China economy is always characterized by its insufficiency of domestic demand. In other words, the ordinary people do not want or are not able to consume as much as the producers expect. Where have the money gone? Some put money into their bank account. But most people's purchasing power is much weaker than economic development. The annual growth rate of income is only 6-7% but GDP increases at about 15% each year. It is estimated that the supply of consumer goods exceeds demand by 70%. Now the average Chinese people make only RMB 700 (less than US$100) each month. How could they afford the way of life of high consumption?

This is also an issue of economic inequality. The fast-growing sectors, particularly the companies related to raw material such as oil and electricity, and property developer, made a lot of money. So did the China government and banks. But the ordinary people did not gain much. That is why there is an oversupply of credit in China. In order to make more money, the banks lend most money to the fast-growing sectors and make a never-ending cycle of economic overheating. The privileged class further capitalizes on this chance to accumulate their wealth. That is why CPI(Consumer Price Index) increases mildly compared to GDP and other economic indicators.

According to the ILO's report, most Asian people experienced rapid economic grwoth but suffered from economic hardship including low wage and unemployment. 1 billion people earn less than US$2 each day in Asia. More jobs also need to be created for satisfying the expanding labor force. Chinese Workers' productivity increased by 170% from 1990 to 1999 but their real wage only increased by 80%. India is even worse. The salary of workers in India decreased by 22% while labor productivity increased by 84%.

Now China economy is primarily driven by persistent investment in fixed capital and export. The Beijing government fails to stimulate domestic demand. What it can do is to keep tightening credit supply and cooling down the property market. But many people begin worrying about the shrinking US economy which is supporting China's economic growth.