China has been in a deflationary period since later 1997, with the fast growth of the economy in the past twenty years. Statistics from China National Bureau of Statistics (NBS) reveal that the consumer price index in June of 2002 dropped 0. 8 per cent on average across China, compared with the same period last year.  Yan Xianpu, an economist with the NBS said that urban per capita disposal income increased 17. 5 per cent in the first six months of the year with only 8. 6 per cent growth rate in overall retail volume of consumer commodities.  This shows that people are reluctant to spend money.
More statistics from the NBS indicate that the income growth of residents, especially that of rural residents, increased slowly compared to the growth of gross domestic product (GDP).  The low growth rate had a negative impact on the purchasing power and weakened domestic demand. During the past decades, exports contributed greatly to China’s economic growth. Under the dual competitive pressure posed to China due to the hi-tech competence of the developed countries and the low price merit of the surrounding countries taking advantage of their currency devaluation, China’s exports have curbed growth.
In addition, potential uncertainty in international environment would worsen the condition of China’s foreign trade. Therefore expanding domestic demand, i. e. , stimulating domestic purchasing power may be the key to maintain a continuous growth of China’s economy. Raising the income levels of the low-income group, mainly consisting of the rural farmers and the increasing number of laid-off urban workers, is of paramount importance to increase overall purchasing power and to expand domestic demand. The income gap has been widening greatly accompanying with the current transition from planned economy to market economy.
The consequence of this lead to a phenomenon in which the minority controls the majority of purchasing power. The low-income people even cannot afford many necessities due to their weak purchasing power. However, high-income people only spend a small portion of their strong purchasing power since they have ample commodities and good services. It is said that the urban residents with the lowest incomes expended nearly all of their purchasing power, while residents with the highest incomes only spent slightly over half of their purchasing power in 2000. 3] The tax authorities will strengthen tax collection from high-income earners in an effort to adjust allocation of income and to increase the purchasing power of residents with low and mid-income. Increasing farmers’ income is the crux to expand demand in rural areas.
Arthur Liu suggested some measures, for example, improving the infrastructure of countryside, establishing the rural consumer goods markets, developing rural information service system, etc should be taken into account to increase farmers’ income, thus expanding rural demand. 4] Experts estimate that every 100 billion yuan of consumption occurred in rural areas will cause 235. 6 billion yuan demand for the whole national economy.  Meanwhile, it is emergent for China’s government to enhance the social security system in order to promote the consumer confidence. Despite the frequent interest rate cutting by central bank in recent years, aiming to stimulate people to spend rather than to hold their money, the majority prefer saving to buying. The systemic changes of economy and society in China have caused people to save money for uncertain futures.
According to a survey conducted in seven big main cities, there are three top reasons that can explain the phenomenon: preparation for emergencies, for children’s education and for retirement.  The income of ordinary urban residents has been rising, but a definite and stable social security system has not been well developed to ensure such things as unemployment compensations, medical insurances and retirement pensions, thus leaving a sense of insecurity among medium and low incomers. Only the establishment of a comprehensive social security system can ordinary people be relieved of worries that prevent them from spending.
Furthermore, some unjustifiable policies curbing consumption should be abolished or revised to spur well-off residents’ purchasing power. For example, the old policies on automobile buying made car prices very high compared to actual cost. The various fees collected by the government account for 30-50 per cent of automobile prices. A senior official of central government said that government would issue new policies on the purchase of automobile and expansion of the automobile market.  The majority of spending by high-income residents goes toward housing, private vehicles, education and medical treatment.
Exemption or reduction of taxes and fees in these sectors may be necessary to create convenience for consumers, especially for those with high purchasing power who spend less. Finally, certain action should be taken to eliminate rampant illegal activities like piracy, counterfeit and profiteering, which make people unwilling to unleash their purchasing power. In conclusion, stimulating the purchasing power to counteract the looming deflation and sustain the growth of economy is a strategic choice in conformity with China’s national conditions. It is suggested that a series of measures be adopted to buoy up consumption.