By Jin Sanlin, Development Research Center of the State Council (DRC)

Research Report No 71, 2009

I. General Features of the Growth of China's Domestic Demand since Reform and Opening Up

1. Domestic demand maintains a fast growth on the whole, with an average growth of 10%

Over the past 30 years since reform and opening up, domestic demand in China (final consumption plus capital formation, namely, consumption plus investment) has maintained a fast growth on the whole, registering an average annual real growth rate of 10% during 1979~2007, or 0.5 percentage points lower than the average GDP growth rate by expenditure approach (10.5%). The domestic demand grew at the highest speed in 1985, hitting 19.4% and dropped to the lowest point in 1989, being only 2%, with the range of fluctuation reaching 17.4 percentage points, being 5.7 percentage points higher than the fluctuation range of the GDP growth rate by expenditure approach.

2. Growth of domestic demand is evidently periodical but is not in pace with GDP growth

In light of wave crest to wave crest, the growth of domestic demand has experienced three cyclical periods since reform and opening up: 1979~1985 was the first period, with an average growth rate of 11%, the crest value 19.4% and the trough value 5.7%; 1986~1993 was the second period, with an average growth rate of 8.9%, the crest value 15% and the trough value 2%; 1994~2006 was the third period, with an average growth rate of 10%, the crest value 13.2% and the trough value 5.4%. After 2007, the growth rate for domestic demand dropped back to 12.1% and is now undergoing a downturn trend in the fourth period.

During the first two periods, the crest value of the growth rate for domestic demand was realized one year later than that of the GDP growth rate. However, during the third period, affected by the growing external demand, the crest value of the growth rate for domestic demand was realized one year earlier than that of the GDP growth rate.

3. The proportion of domestic demand in GDP remained above 98% for quite a long time, but declined obviously after 2003

During 1978~2007, the proportion of domestic demand in China's GDP by expenditure approach hit an average of 98.4%, holding an absolute dominant position. During this period, the said proportion before 1996 remained above 98% on the whole, reaching the highest in 1985 to 104%; the proportion began to drop slowly after 1997 and declined fast in 2003, down from the previous 97.8% to 91.1% in 2007 (which was the lowest since reform and opening up), showing an annual decline of 1.7 percentage points on average. Accordingly, the proportion of net exports in GDP increased from 2.2% to 8.9%, up 6.7 percentage points.

4. The contribution rate of domestic demand to GDP growth fluctuated a lot and the accelerated growth rate for domestic demand and the reduced contribution rate coexisted after 2003

During 1978~2007, the average contribution rate of the domestic demand to China's GDP growth was 92% and hit an all-time high in 1985 to 166.4%; the rate dropped to the lowest of 49.6% in 1990. By and large, before 2003, the contribution rate of domestic demand to GDP growth changed in step with the growth rate for domestic demand: when the domestic demand grew fast, its contribution rate was high or the rate was low the other way round. But after 2003, with the proportion of net exports in GDP growing, while domestic demand maintained a fast growth，its contribution rate went down from 99% in 2003 to 80.3% in 2007, down 18.7 percentage points over 4 years' time, or down with an annual average of 4.7 percentage points. During 2004-2007, the average contribution rate of domestic demand to China's GDP growth was 82.7%, down nearly 10 percentage points as compared to the average rate over 30 years of reform and opening up.

5. The proportion of consumption in domestic demand fluctuated and went downward while that of investment fluctuated and went upward

During 1978~2007, the proportion of consumption in domestic demand hit an average of 61.8% and that of investment (gross capital formation) 38.2%; the average contribution rate of consumption to the growth of domestic demand was 62.1%, while that of investment 37.9%. In general, the proportion of consumption in domestic demand dropped gradually, while that of investment rose gradually, both during certain phases. During 1978~1982, the proportion of consumption went up, while that of investment went down. The average proportion of consumption in domestic demand accounted for 65.2%, while that of investment for 32.4%. During 1983~1993, the proportion of consumption went down, while that of investment went up. The average proportion of consumption constituted 63.6%, while that of investment accounted for 36.4%. During 1994~2000, the proportion of consumption went up year by year, while that of investment went down year after year. The average proportion of consumption registered 61.3%, while that of investment 38.7%. After the entry into the 21st century, the proportion of consumption went down again from 62.7% in 2001 to 53.5% in 2007, showing an annual average of 57.1%; correspondingly, the proportion of investment went up from 37.3% in 2001 to 46.5% in 2007, suggesting an annual average of 42.9%.

Table 1 Proportion of Consumption and Investment in Domestic Demand and Their Contribution to Economic Growth (％)

Data: Historical Data for GDP Accounting During 1952~2004, China Statistical Yearbook (2006~2008)

II. Main Features and Characteristics of Investment Growth at Various Stages

1. Investment saw an average annual increase of 11%, with the average growth rate and the fluctuation range all higher than GDP growth

Since reform and opening up, the investment in China maintained a fast growth on the whole, registering a real average annual increase of 11% during 1979~2007, being higher than the average GDP growth rate (10.5%) by expenditure approach. The maximum investment growth occurred in 1985, reaching 28.4%; while the minimum turned up in 1981, being only -0.8%, which was the only negative growth since reform and opening up; and the fluctuation range hit 29.2 percentage points, being 17.5 percentage points higher than the GDP growth rate by expenditure approach and 11.8 percentage points higher than the growth rate of domestic demand, suggesting a frequent fluctuation of the investment growth.

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