Date 01 July 2009

Domestic consumption is an increasingly important pillar of growth for China’s economy. This is becoming apparent as exports can no longer support the nation’s growth rates and mitigate the effects of a global economic downturn. In fact, China’s exports fell by 20 percent in the first quarter of 2009.

One major factor contributing to consumer spending is the general level of disposable income. Higher incomes induce greater consumption as people seek to improve their standards of living. Tax cuts and subsidies further stimulate this and have been proven to be extremely effective thus far - a 50 percent reduction in sales tax on cars in January was able to induce record sales of 1.11 million vehicles two months later.

However, the domestic market is clearly underdeveloped, accounting for just 37 percent of China’s GDP in 2008 as compared to 70 percent in the United States. This may be attributed to an inadequate social welfare system that creates excessive saving in preparation for unexpected circumstances and retirements. Nonetheless, things may be set to change with China’s $586 billion stimulus plan, part of which has been set aside to build hospitals across China and increase medical insurance coverage to 90% nationwide by 2011. This should result in a gradual increase in consumption as people reduce savings on gaining greater security in terms of medical healthcare.