Researcher says China must promote domestic consumption for recovery

China needs to promote domestic consumption to make up for weak global demand because its economic recovery isn’t firm, a government researcher said.

“Global demand won’t recover to the pre-crisis levels within two to three years,” Xia Bin, head of the financial institute at the State Council Development and Research Center, said today at a forum in the southern Chinese city of Shenzhen. “The rebound we’ve seen in China’s economy in the first half has been driven by increased investment to make up for the slump in external demand.”

China has to boost domestic consumption by increasing household income and not just through gains from property and stocks, Xia said. The central bank should send a signal for stable money supply in the second half or “early next year” to guard against the risks of asset-price inflation, Xia said.

“Wealth effects from stock and property investments can help consumption in the short term but it won’t last,” Liang Futao, a research manager at Changjiang Pension Insurance Co. in Shanghai, said by phone. “Rising asset prices can form a bubble, which will hurt the economy when it bursts.”

China’s central bank Governor Zhou Xiaochuan said yesterday that boosting the nation’s consumer spending to redress global imbalances is “easier said than done.”

The People’s Bank of China scrapped lending quotas in November and has kept interest rates at a four-year low, triggering an explosion in credit to support Premier Wen Jiabao’s 4 trillion yuan ($585 billion) stimulus package.

Manufacturing in the world’s third-largest economy expanded for a fourth month in June. The official Purchasing Managers’ Index rose to a seasonally adjusted 53.2 from 53.1 in May, the Federation of Logistics and Purchasing said July 1. A reading above 50 indicates an expansion.

Source: Bloomberg