ccording to data released by China’s Ministry of Culture and Tourism, during the eight-day National Day holiday between October 1 and October 8, the Chinese mainland saw 637 million tourist visits, generating a total revenue of 466.6 billion yuan (US$69.5b). The number of visits was 79 percent of that seen during the holiday period in 2019, and revenue was 70 percent of the 2019 level. This indicates a strong bounce-back for the virus-hit domestic tourism sector.
In the past months, given the economic pressure under the Covid-19 pandemic and intensifying trade and economic frictions with the US, Chinese leadership has proposed a “dual circulation” model to maintain the momentum of the country’s economic growth. The model prioritizes internal circulation or the domestic economic cycle with an emphasis on boosting domestic demand, which will be supplemented by external circulation, or trade with other countries.
Many analysts see the strong recovery of domestic tourism as a reflection of strong consumer confidence which may serve as a starting point of the dual circulation strategy. But to boost domestic consumption, the government should have a pin-point strategy.
First, the Chinese government should continue measures to curb housing prices. In the past years, rocketing real estate prices have led to panic buying and a substantial increase in the levels of household debt. This has been a major factor in suppressing domestic consumption. The government should have learned its lesson and refrain from resorting to stimulus for the real estate sector to boost the economy.
Second, the government should continue to cut taxes and fees, especially in the private sector. By nurturing a strong and vibrant domestic private sector, it will not only boost both domestic employment and consumption, but will help the much desired consumption upgrade.
Finally, the government should continue to increase financial inputs in medical services, education and elder care. Public concern about these three areas has long been considered a major factor affecting not only consumer confidence, but also the decline in the fertility rate. Failure to address these concerns should have both a short-term and long-term impact on China’s economic growth prospects.
In the past few decades, China achieved rapid economic growth by first focusing on boosting exports, and later by relying on an investment-driven model that focuses on real estate and infrastructure. Domestic consumption has been a weaker link in China’s economic model. Given the new challenges, China’s policymakers should adopt different approaches.
With a population of 1.4 billion people, China has great potential in boosting domestic consumption. According to a prediction by Professor Li Daokui, director general and chief economist at the New Development Bank, the size of China’s middle class will double from 400 million to 800 million people in 15 years. But this transformation will not happen by itself. It will take shrewd and active economic policymaking. While the new domestic and international situation pose major threats to China’s economy, it could also serve as an opportunity for China to transform its development model to achieve a more balanced and people-centered development.