By Zhang Junkuo

I. Economic growth still presents a general trend of continuous slowdown and the potential of growth is to be fully tapped.

In spite of the adoption of an expansive financial and monetary policy by the Chinese Government for consecutive years, which has saved the Chinese economy from sharp fluctuations and kept it a fast growth, the speed of growth has never turned off the general trend of continuous slowdown and the potential of growth has not yet been fully tapped.

It can be seen from Chart 1 that the growth of the Chinese economy has kept slowing down since 1992. This process should not be taken up in the lump. Instead, it should be studied specifically. In 1992, the annual growth rate jumped over 14 per cent, a rate of obvious economic overheating. In view of the situation, the Central Government took strict measures of macro-regulation including adoption of administrative measures such as strict control over bank lending and scale of fixed assets investment. For this reason, the slowdown of growth during this period of time was a normal response to the measures of macro-regulation and a normal fall after overheating of the economy. The continuous slowdown of economic growth since 1997 is, however, obviously different. During this period of time, the Central Government has shifted to an expansive financial and monetary policy to increase domestic demand and stimulate the economy as a whole. Except for a slight rebound in the year 2000, growth of the Chinese economy has kept slowing down in general terms. The immediate cause of the continuous slowdown of economic growth has been insufficient market demand. Products are unmarketable, and large amounts of production capacities remain idle, especially in the general processing industry. There has been no new hot spot of consumption at the market, and enterprises have had no way to find any good projects for investment. Why has China suffered serious deficiency of market demand and tremendous surplus of production capacities when it has just reached a fairly primary stage of development? To answer this question, it is necessary to make further study of the factors leading to the fall of general demand.

II. Slowdown in the growth of consumption demand of rural residents and the demand for non-governmental investment--two major factors restricting growth of domestic demand

Demand can be divided, first of all, into domestic demand and overseas demand. Undoubtedly, the Asian financial crisis in 1997 and its serious influence upon China's exports have constituted an important factor causing the slowdown of growth of overall demand. In 1998, for instance, China's exports grew by merely 0.5 per cent. For a big country like China, domestic demand will always play a decisive role ill the economic growth, from a long point of view, the influence of export growth on the economic growth as a whole will be comparatively smaller (as shown in Chart 2). Domestic demand can be further divided into demand of consumption and demand of investment. From the angle of demand of consumption, the retail of consumer goods in China's urban areas stood at RMB631.4 billion in the first quarter of the year 2002, all increase of 9.3 per cent over the previous year. Retail sales of consumer goods in the rural areas were RMB372.1 billion during this period of time, up by 7 per cent and 2.3 percentage points below the figure for the urban areas. With regard to the situation over the recent five years, the slowdown in consumption demand growth has its root mainly in the rural areas, as indicated in Table 1.

Note: The absolute figure for domestic demand is the sum of domestic investment and domestic demand calculated in current price, with readjustment made according to the average index of national income during the calculation.

Table 1 Actual growth of consumption demand in China over the recent five years

It can be clearly seen from Table 1 that growth of consumption demand in China's rural areas has always lagged behind that in its urban areas. Since 1998, in particular, the gap between growth of consumption demand at the rural market and the urban market has widened constantly rather than narrowing. As the situation stands, the emphasis of the policy to increase domestic demand of consumption should be put on creating and promoting the demand at the rural market, in addition to maintaining a comparatively fast growth of consumption by the urban residents. With regard to the investment demand, the Chinese Government has issued long-term construction bonds for years running after the Asian financial crisis to expand the scale of investment by way of direct government investment. By 2001, China issued a total of RMB 510 billion worth of treasury bonds. Plus supplementary funds from banks, total investment by the Chinese Government exceeded RMB 2,500 billion. Although the growth rate of investment as a whole has maintained a comparatively fast speed due to the direct government investment, the results in spurring non-governmental investment have not been so encouraging. In the first quarter of 2002, total fixed assets investment by the society as a whole was RMB 467.2 billion, 19.6 per cent more than a year ago. This growth rate was 7.2 percentage points higher than the figure for the same period of last year. Of this total, investment by enterprises and institutions of State ownership and other ownerships (excluding collective and private investment in the real estate industry) stood at RMB 304.9 billion, 25.1 per cent up from the year before. Investment by collective and private enterprises, meanwhile, came to RMB71.7 billion and RMB90.7 billion respectively, climbing up by 12.6 and 9.1 per cent respectively.

III. Structural contradictions are the root cause of insufficient domestic demand.

1. Structural contradictions of agriculture and demand of consumption in the rural areas Further analysis has revealed that a major cause of slowdown in consumption demand growth in rural areas has been the obvious fall of the income of the rural residents behind that of the urban residents in recent years. As shown in Table 2, income growth of rural residents has been slower than that of the urban residents in all years except 1997, when the former outpaced the latter by one percentage point. Also, the gap has remained big. In the recent three years, in particular, the gap has more than doubled.

Table 2 Growth rates of incomes of China's rural and urban residents over the recent five years

There have been two fundamental factors leading to the decrease of the rural residents' income: the first one has been the substantial change in the situation of supply and demand of agriculture products, and slowdown in growth of farmers' income from agricultural; production and non-agricultural industries, especially from township enterprises. In the early days when China began to implement the policy of reform and opening-up, the income growth of farmers outpaced that of urban residents for many years thanks to big increases in the output of farm produce and constant increase of the purchasing price of farm products by the State. As supply and demand of farm products gradually changed from pattern of shortage to relative surplus, and restrictions at the international market stiffened, however, not only has the margin of price rise gradually disappeared, the price even took on a falling tendency. The second factor was also in the early days of reform and opening-up, ordinary consumer goods, foodstuffs and light and textile products in particular, were short of supply. All commodities could be sold out so tong as they were manufactured. Under such a market environment, township enterprises were able to develop rapidly. As the production capacities of general processing industries became excessive, market competition began to intensify, and the demand on enterprises became all the more stricter in terms of technology, finance, management and quality. A small number of township enterprises have stood the test of market competition and moved ahead, while most others have been eliminated in competition.

At the same time, there have been fewer and fewer blanks at the market, and establishment of new township enterprises has become more difficult. Due to the slowdown in growth of township enterprises, farmers would have fewer chances to find jobs in these enterprises, and growth of their wage incomes from enterprises has slid relatively. Under a circumstance where bulk farm products have become extensively excessive and their prices have risen above the international level, it is obvious that the traditional way of increasing the income of farmers by relying on bigger output from agriculture will no longer work. The only way out is to readjust the planting structure of agriculture, that is, to develop a high-efficiency agriculture tailored to market demand. The market for farm products with high value-added exists not only ill China, but also across the globe. It should be said that the potential to develop a high-efficiency agriculture by readjusting agricultural structure is huge. The market prospects for pollution-free vegetables and fruits, for instance, are extremely promising.

Remnants of farm chemicals in vegetables and foodstuffs and remnants of hormones in meat and eggs have now become a hideous issue with serious influences upon the health of people. Consumers will be willing to pay more for healthy foodstuffs. Although readjustment of agricultural structure has been discussed for many years, no visible results have been achieved so far. A major reason is the lack of market organs and mechanisms for the development of a new agriculture. Different from bulk farm products that rely upon purchases by the State, a high-efficiency agriculture depends more on market mechanisms. Only by bringing into play the role of market mechanisms can a new spot of growth be found. In China, however, farmer households are scattered widely, how can these farmer households be linked up with a vast market? Where can they get the information, technology or funds for carrying out planting? Or to which market shall they sell their products? Although some modes such as ''companies plus farmer households'' have been invented from practice for industrialized development in recent years, no market organs or mechanisms suitable for the development of a new-type agriculture have yet been created so far as the overall situation is concerned. Under the current situation of agricultural population and land resources, China can by no means hope to achieve its goal of increasing the income of farmers or modernizing rural areas merely by relying upon agriculture. The only long-term and fundamental way out is to turn farmers into non-farmers. Only by freeing the surplus labors from agriculture can the pressure on the scarce farmland be alleviated and the labor productivity of agriculture be increased. At the same time, the farmers freed from farmland would earn more incomes. The speed of transferring agricultural population to non-agricultural sectors depends, most importantly and fundamentally, on whether sufficient job opportunities can be created for farmers through the development of non-agricultural sectors. The slowdown in the transfer of surplus rural laborers into non-agricultural sectors in recent years is attributable, in final analysis, to the insufficiency of newly created non-agricultural job opportunities. Thus it can be seen that although the slowdown in growth of consumption demand in China's rural areas is a problem concerning demand, it is in reality a problem relating to the country''s systems and structures. The problem of slow growth of farmers'' incomes has its origin in the rural areas, but the root cause and solution lie in non-agricultural sectors. The problems haunting farmers will be solved once and for all only when non-agricultural sectors have developed. It is necessary, of course, to remove various forms of obstacles (including residence registration) hindering the flow of farmer workers and to provide farmers moving to work in urban areas with various services including social insurance and education of their children during the process of development. But these moves are not fundamental. What is of most importance is to provide them with sufficient Job opportunities. 2. Consumption upgrading of urban residents and changes in the structure of consumption demands The income and consumption of China''s urban residents were both fairly low before 1978 when the country inaugurated the policy of reform and opening-up, and began to rise in the years that followed. In addition to improving food and clothing, urban residents began to spend the increased incomes basically on durable consumption goods represented by electric household appliances. In other words, they began to spend money on daily use, and had not yet started to spend money on housing or transportation. Since the increase of incomes was fairly equalized at that time, there was no big gap. Meanwhile, the prices of ordinary electric household appliances stood at levels suitable to the residents with comparatively low incomes and consumption. This resulted in the development of a billowing trend of consumption of daily use consumer goods and durable electric household appliances, and provided the basis for the boom of China''s domestic market of daily use consumer goods and durable electric household appliances and relevant industries in the middle 1980s. By the 1990s, however, the need for regular commodities was basically satisfied. Durables market, in particular, largely became saturated. Consumption demand thus entered a period of normal and steady growth, and big-scale or centralized growth of demand was no longer possible.

After consumption of basic commodities and demand for durables represented by electric household appliances were basically satisfied, changes took place gradually in the hot spot of consumption of China''s urban residents. They began to pay attention to issues relating to shelter and transportation, that is, houses and cars. Compared with consumption of durables in the past, consumption of houses and cars not only involves big amounts of money, but also poses higher demands on both hardware (such as transportation facilities and parking lots) and software (such as various kinds of surcharges and restrictive policies on consumption of cars) environment of consumption. Only a small number of people that had become rich first and earned high incomes could afford car and housing consumption. As for the majority of the urban population, they basically faced such a situation: satisfaction of basic consumption, basic saturation of durables, no need to spend more on consumption of these articles, but they could not realize their dreams of buying a car or house for the time being because of either shortage of funds or restriction of other conditions. As a result, a considerable sum of funds was accumulated and became bank saving deposits. Another remarkable change in the consumption structure in China's urban areas was that China's urban residents began to spend an increasing amount of money on consumption of services including education, medical treatment, health care, and travel. Although spending on these items did not cut into the country's total volume of consumption, it did reduce demand for regular commodities, thus posing pressure of decreasing demand on the ordinary processing industries. With the deepening of market reforms and intensification of market competition, rivalry at labor markets became all the more tense. Bankruptcy of enterprises, laying off of workers, and unemployment became common scenes. What was worse, the belated development of social insurance system contributed to constantly sharpening the sense of individuals about saving money for old ages and for diseases. This cut deeply into prompt consumption and increased the long-term bank saving deposits. During the process of readjustment of economic structures and transformation of economic systems, either for the upgrading of the consumption structure of individual residents, or for the purpose of preparing for old ages, medical treatment, and education of children, the long-term saving deposits are the result and reflection of economic contradictions. They also provide a valuable resource for the solution to the structural contradictions in Chinese economy. If this sum of money could be put into effective use, it would add stamina to long-term economic growth. Otherwise it would become an unfavorable factor. Long-term savings should be directed to construction projects with comparatively long cycles of construction and long periods of recovery of investment, and such projects most needed for urban development in China at present. If we compare Chinese cities with those in developed countries, we can see that the gap between the two lies mainly in basic facilities and living environments, such as urban transportation including metro and light rails. These facilities call for large amounts of funds to construct, and involve extremely long cycles of construction and investment recovery. Once they are completed, however, these projects will benefit several generations. In this sense, these projects can be counted as real national accumulation. In China, however, progress in this field has been fairly slow in most cities except for a very small number of large cities since the beginning of reform and opening-up. The earlier the construction of public transportation facilities in urban areas, the smaller the investment and the greater the initiative, and vice versa. China boasts long-term bank savings and sources of funding, and does not lack the technology, funds, materials and labor force needed for the construction of urban basic facilities. The fundamental reason for the fairly slow progress in this field is the lack of effective mechanism to turn long-term bank savings into long-term investment. In some regions and cities, investment from the Central Government would come into mind whenever construction of metros or environmental protection projects is concerned, and strains of local finance would be referred to as an excuse for inaction. As a matter of fact, the urban infrastructure and public facilities would promise extremely stable returns over a long period of time. So long as the mechanism for investment and supervision is rationally designed, these would be the most desirable fields longed for by private investors to invest or operate. The problem at present is the lack of an effective mechanism to turn tong-term bank savings into long-term investment. As a result, the large amount of savings can't play a role in promoting construction of long-term projects, but become a heavy burden. Thus it can be seen that although consumption demand in China's urban areas has seen a relatively fast growth in recent years, because of the conspicuous structural contradictions in the relationship between supply and demand, the production capacity of the regular processing industry be came relatively excessive, and the price kept on falling. 3. Institutional defects and insufficient demand of non-governmental investment In 1992, 1993 and 1994, growth of fixed assets investment in China as a whole hit 44.4, 61.8 and 30.4 per cent respectively. Although the major factor leading to the fast growth of investment during this period of time was the speech made by Deng Xiaoping, the architect of China's reform and opening-up policy, during his inspection tour to the south, which encouraged enterprises to increase their investment, another factor that could not be ignored was that local governments constituted the mainstream of investors at that time. Through government interference, large amounts of funds were diverted from banks into numerous real estate projects backed by local governments. The real estate bubble growing there from and the negative influence from the breaking up of the bubble can still be seen in some coastal cities today. Since 1993 when efforts of regulation and rectification were started, local governments have gradually withdrawn from direct investment and enterprises, including the State-owned and privately-owned, have replaced local governments as the mainstream of investors. Compared with investment by local governments, enterprises would pay greater attention to the efficiency of investment when they make investing decisions. In addition, the soft restriction of bank funds has been gradually changed through a series of reforms. The slowdown in investment growth resulted from these factors is normal. It is neither possible nor right for us to expect the re-occurrence of the overheated demand of investment as we experienced in the past. The slowdown in growth of investment demand is also a reflection of the structural contradictions and institutional defects in the investment field. There goes a very popular saying that inability of enterprises to find ideal projects for investment is to blame for the slow growth of investment. Since the production capacity is seriously excessive in the ordinary manufacturing sector, enterprises would suffer overstock of products no matter in whatever sector they invest, just as farmers would suffer overstock of farm products no matter whatever they grow. Is this true?

Absolutely no. We have not yet reached the level of extreme material rich. Compared with developed countries, China still lags far behind. Even if with regard to the actual situation, we still have lots of inconveniences in daily life. On the one hand, many demands have not yet been met, on the other hand, the quality and grade of the products whose demand has been met remain at a low level, and their varieties are limited. Take central heating in North China for an example. In developed countries such as Germany, all heating apparatuses are equipped with on/off switches and temperature-regulating buttons so that they can be switched off when nobody is in and the temperature can be adjusted as desired. This not only saves energy, but also provides greater comfort. This measure, badly needed in a country like China that suffers from energy shortages, has not been adopted till today. It is said that the adoption of this measure involves complicated institutional problems relating to the management of construction. Obviously, to fill these blanks of demand not only calls for enterprises to develop a fairly strong ability of creation, but also requires close cooperation of concerning policies. The problem is that under a circumstance where the function of local governments as the mainstream body of investors has weakened and the desire for investment has abated, the new investment and fund-raising mechanism with enterprises and individual residents playing the leading role is still defective in many aspects and can not play any effective role. First of al1, the role of State-owned enterprises as the mainstream body of investors can hardly be brought into effective play. Since no breakthrough has been made despite years of reform, the majority of State-owned enterprises, except for the few that occupy monopoly position or receive government support or subsidy in one way or another, suffer from surplus employees and heavy burdens of historical debts. Under a circumstance of excessive production capacity in the ordinary processing sector and extremely tense of market competition, they are comparatively weak in terms of ability to raise funds, earn profits, or repay debts. More often than not, these enterprises can hardly eke out a living. How can they be expected to expand investment or launch any projects of renovation? The saying that "it is waiting for death not to launch any projects of renovation, and it is looking for death to launch any projects of renovation,"which used to be fairly popular among State-owned enterprises, is a vivid description of the situation. Also, the problems of ambiguity of ownership and mixture of government function with business operation inherent in State-owned enterprises have not yet been solved thoroughly, the enterprises lack adequate flexibility when they come to choose projects or make investment decisions. Secondly, private enterprises are exposed to numerous restrictions when making investment or launching new