Speeding up urbanization and expanding domestic demand invite strategic plan to push forward institutional reforms

Whether China can smoothly advance its efforts to build a well-off society in an all-round way within the next decade hinges on whether the country can realize the opportunities produced by releasing its enormous domestic demand, effectively tap the huge potential of accelerating urbanization, and, more crucially, achieve reform breakthroughs in some key fields.

Domestic demand, if fully released, is expected to bolster economic growth of 7 to 8 percent in the coming years. As the focus has shifted from feeding and clothing people to larger and higher-level development, China's consumption demand has continuously expanded and its consumption structure has experienced profound changes.

The country is now transforming from resources-dominated consumption to services-dominated consumption. It is estimated that the volume of China's urban and rural nominal consumption will top 50 trillion yuan ($8 trillion) by 2020, which, together with related investment activities, will result in nearly 100 trillion yuan of domestic demand. Such colossal domestic demand, if effectively released, will not only fuel China's economic growth over the next decade, it also offers an important driving force for the transformation of the country's economic development model.

Urbanization will serve as the largest force releasing China's potential domestic demand. To advance urbanization, as mapped out by the Party's new leaders, the country will pursue higher quality urbanization rather than just the expansion and creation of cities. This means greater efforts are needed to promote integrated urbanization, instead of segregating the city and countryside. Higher quality urbanization will help the country better release its enormous domestic demand potential and lay a solid foundation for the establishment of the nation's long-anticipated new development model.

Whether such a goal can be obtained will be decided, to a large extent, by whether the country can forcibly push forward sweeping reforms in a range of areas. China's success largely lies in the huge dividends originating from its continuous institutional reforms and improvements over the past decades. The achievement of a similar success in accelerating urbanization and expanding domestic demand in the years ahead will depend on the country's efforts to push forward institutional reforms, ranging from reforms aimed at realizing a dynamic balance between investment and consumption and a more reasonable distribution of State capital to income distribution that can help increase the middle-income population.

For example, to promote higher quality urbanization, so as to effectively tap its potential, the country should take substantial steps toward reforming its entrenched household registration system and the current land system and step up efforts to integrate migrant workers as urban residents. Without such breakthroughs, there is little chance of China maintaining sustainable development in the years ahead.

A successful transformation into a consumption-led society will aid China's economic growth for a longer period, which in return will further facilitate its higher-level transformation and reforms. To accelerate this process, China should draft a timetable for the building of a consumption-dominated economic model as soon as possible. For example, it should take practicable measures to raise its final consumption from the current 49 percent of gross domestic product to more than 60 percent by 2020, and it should make consumption an intrinsic driving force of national economic growth.

At the same time, the country should also map out a strategy to release domestic consumption and push for adjustments in its investment and State capital strategies.

China should regard the releasing of its domestic demand through urbanization and institutional innovations as a strategic focus of its efforts to build a well-off society and promote equitable and sustainable development. This requires bigger steps be taken to build a new urbanization pattern, one in which migrant workers become urban residents.

As a way of doubling the incomes of urban and rural residents from the 2010 level by 2020, China should first create conditions for the incomes of the middle-income group to grow, which will help maintain social stability and boost domestic demand. The considerable rise in their incomes will not only facilitate China's economic and social transformation and reforms, it will also be beneficial to coordinating relations between different interest groups. An expanded middle-income group will also help form a consensus within society on reforms and boost national confidence in the reforms.

China should expand the middle-income group from the current 23 percent of the population to 40 percent of the population by 2020, which would mean a middle-income population of 600 million. To cultivate the expansion of this group, China should accelerate its long-anticipated income distribution reforms.

To realize its development potential, China should also change the current government-led growth model, reduce the government's presence in economic activities and push forward necessary market reforms, such as resources pricing and its established fiscal and taxation systems.

Experience indicates that deepening reforms in some key areas will face huge obstacles and challenges. To keep reform on track, the country should design and layout reforms at the top level, drafting an unequivocal blueprint and timetable for reforms in the years ahead. To facilitate such reforms, a top-level reform coordination agency should be set up as early as possible.

The author is president of the China Institute for Reform and Development based in Hainan province.

(China Daily 02/28/2013 page8)