News Analysis: Economic Growth Fueled by Domestic Demand

Increasing domestic demand contributed to 93 percent of the 7.9 percent growth of China's economy in the first half of the year, showing that the economy had successfully switched growth engines as exports slowed down by 26 percentage points during the period.

Spokesman for the National Bureau of Statistics (NBS) Ye Zhen said Tuesday that the economy is likely to reach or even surpass the target growth rate of 7 percent for the year.

In contrast to a slowdown in the world economy, China's economy maintained a rapid growth rate, relatively high quality of growth and a low inflation rate in the first six months of the year. This is mainly due to the results of the proactive fiscal policy that the Chinese government adopted to stimulate domestic demand.

Since the government has been funding infrastructure construction with money from issuing treasury bonds over the past three years, the demand for investment has increased. During January-June period, the investment in fixed assets surged 15.1 percent year-on-year, 4.1 percentage points higher than the growth rate in the same period of last year.

Investment by private and collective sectors jumped 7.5 percent in the period.

The Ministry of Finance predicts that as more T-bond money is channeled to construction projects, demands on the investment side will continue to grow in the latter half of the year.

Thanks to the policies that the Chinese government adopted to increase people's income, install market order and relax price control, the consumption demand has improved markedly.

Official figures showed that retail sales were picking up speed in the first half-year, surging 10.3 percent over the same period of last year. Consumers are increasingly willing to spend on housing, durable consumer goods, automobiles and educational and tourist services.

The improvement of consumption demand, in turn, propped up the growth of investment. According to official figures, the investment in real estate development surged 28.2 percent year-on- year in the first half of the year.

Ye said the global economic slowdown may further reduce the growth rate of China's economy in the latter half of the year. However, he noted that the sentiment behind economic growth will be high in the next six months.

He noted that the government's proactive fiscal policy will continue to exert greater effect on the economy. The country's preparation for the 2008 Summer Olympic Games is expected to push up economic growth by 0.3-0.4 percentage points every year over the next seven years.

He predicts that foreign direct investment coming to the country will rally as investor confidence rises.

According to the Ministry of Finance, the state-owned enterprises (SOE) have improved their vitality through restructuring over the past three years. The total number of SOEs have been reduced while their profits increased.

Local economists say that the economy still face problems such as relatively slow growth of farmers' income and diminishing contribution of exports to economic growth. However, they say that the improving consumer confidence, vigorous private sector and healing state-owned enterprises will combine to sustain a steady growth this year. They believe that the economy will rely on the expansion of domestic demand to achieve the beginning-of-the-year target of a 7-percent growth.






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