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Song Guoqing: Lack in Domestic Demand May Lead to a Loss of Economic Independence

2005-09-12

     A result of weak domestic demand, China's rapid growth is facing the possibility of becoming unstable and losing its independence.  Professor Song Guoqing of Peking University's China Center for Economic Research believes that the overpowering policy of macro-economic control as in the "Hundred Days Effect" has caused "actual domestic investment growth to be close to zero."  This problem has attracted more and more attention to the problem of lack of domestic demand.  He states the GDP in the first half of the year saw nominal growth of 14.7% and actual growth of 9.5% with a trade surplus of 39.83 billion USD, which increased from 1.0% to 4.8% as a part of GDP.  Ignoring the trade surplus, nominal growth of domestic demand was 8.4%, while, overlooking rising prices, the actual growth rate was only 3.5%.  Lack of domestic demand is a result of the development model used by China since the 1990's. After the Asian economic crisis, in addition to the inability of China to spur domestic demand, international trade became the primary focus. 

    This level of dependence on the international market became stronger and stronger, which in addition to a policy favoring exports, caused the influence of the domestic market to decrease, resulting in an imbalance in domestic and international economy.  Now, reliance on foreign trade to move the economy has become abnormal.  January through June of this year, the average percentage of foreign trade driving GDP was 40%, while during one period it reached 56%.  At the same time, underestimation of the exchange rate transferred the low price of resources in non-trade sectors to trade sectors, causing those sectors to greatly expand, increasing demand on resources.  Being subject to an unstable international market and lackluster domestic demand have become serious problems for China's economy.

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