Strategic shifting to consumption would enable balanced economic development and sustain long-term growth

There are a number of factors underlying the ongoing inflationary pressures on China, and the country should pay attention not only to the short-term factors, but also to these systematic factors.

Therefore policymakers should ponder the following three questions before weighing measures to curb inflation.

First, is the continuing investment spree one of the important causes behind the latest round of inflation pressures?

This year is the starting year of the 12th Five-Year Plan period (2011-2015) and the impulse of local governments is to launch an investment campaign and start big projects. Despite an expected 7 percent growth target set by the central government for the country's gross domestic product (GDP) over the next five years, the growth rate mapped out by the 31 provinces, autonomous regions and municipalities for the same period amounts to 10.5 percent on average, nearly 50 percent higher than the national level.

With such an investment fever, whether or not local governments can avoid investment overheating remains a big concern. Statistics show that China's investment has been growing more than 40 percent year-on-year since the start of this century, with the growth rate reaching 47.7 percent in 2009 and 48.6 percent in 2010. Such an investment momentum has continued into this year.

Undoubtedly, investment overheating will push the prices of raw materials, energy and bulk commodities higher, which will increase inflation pressures in the middle and long term and make it more difficult for China to control inflation.

Second, does the country need to transform its investment-dominated economic growth mode to a consumption-driven one as soon as possible to effectively tame inflation?

From a short-term perspective, the increase in people's incomes combined with the country's proactive social security and fiscal policies and its increased monetary supply serve as important factors spurring the rises in commodity prices. However, from a middle- and long-term perspective, the increase in people's incomes will cause greater domestic consumption that will drive the country's economic growth in place of investment. This shift should be China's strategic option to realize a balanced and steady economic development in the long run.

To facilitate such a shift, the country should combine short-term policies aimed at curbing inflation with middle- and long-term policies aimed at promoting consumption-led sustainable growth mode.

To this end, the country should change its investment-dominated development model as soon as possible and try to reverse the decline of the consumption ratio in national economic growth. It should try to raise its final consumption ratio to 55 percent over the next five years from the current 47.5 percent and increase the resident consumption ratio to 45 percent from the current 33.5 percent.

Third, is the transformation of the country's government-led economic growth mode the key to increasing the consumption ratio and promoting a consumption-driven economy?

The investment motivation among many local regions has been directly related to China's decades-long government-led economic growth mode. Under this model, local governments have been preoccupied with the pursuit of GDP growth by trying to expand investment and the approval of some heavy industry or construction projects and trying to use administrative means to promote distribution of resources.

Although such a model once played an important role in promoting the country's economic growth, it has also fuelled long-term investment inflation and resulted in a series of structural imbalances. Consequently, the country's bid to transform its economic development model has been under numerous institutional restraints.

To curb local governments' investment impulses, China should transform its government-led economic growth mode to eradicate the systematic factors behind the current round of inflation.

The author is director of the Hainan-based China Institute for Reform and Development.

(China Daily 07/15/2011 page8)