Key Forces Driving Consumption and Core Principles for Boosting It

Aug 26-2025   

*This article is based on a speech by Zhang Bin, a member of the National Committee of the Chinese People's Political Consultative Conference and Deputy Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

What Really Determines Consumption?

To understand what drives consumption, we can break it down into four parts:

• Total national income (GDP).
• Primary distribution – the share of that income initially received by households.
• Secondary distribution – households’ disposable income after taxes and transfers.
• Propensity to consume – the proportion of disposable income that is actually spent.

Historical data shows the order of impact: GDP growth matters most, followed by propensity to consume, then primary distribution, and finally secondary distribution.

Further analysis:

GDP growth stems from industrial upgrading and productivity gains, but it also fluctuates with the economic cycle.

Primary distribution is shaped by the structure of industry.

Secondary distribution is determined by tax and social security policies.

Propensity to consume is influenced by many factors, ranging from social norms to credit conditions.

In short, the key forces are industrial trends, cyclical conditions, corporate governance and financial rules, tax and welfare policies, and other government measures.

Industrial Forces – The Long-Run Driver

Industrial upgrading is the dominant long-run force affecting consumption: As economies mature, growth naturally slows, which in turn drags consumption growth down. At the same time, the shift from manufacturing to services tends to raise the household share of income and boost consumption.

Cyclical Forces – Short-Term Swings

Over shorter horizons, economic cycles can cause consumption growth to fluctuate by several percentage points—even without any structural reforms. Simply cutting interest rates or ramping up public investment can lift consumption quickly.

Principles for Expanding Consumption

The effective advancement of reform should follow the three basic principles outlined below:

• Principle of Local Priority: Minimize the number of departments involved in the reform and the scope of related policies as much as possible. Meanwhile, keep the requirements for supporting institutional mechanisms as simple as feasible, striving to ensure the reform is implemented more smoothly.
• Principle of Incremental Priority: First, expand policy space through incremental measures, and then activate existing stock resources.
• Principle of Policy Effectiveness: Prioritize reform policies that have a stronger impact on either increasing the propensity to consume or raising the share of residents’ income.

Sequence for Implementing Policies to Expand Consumption:

• Countercyclical Policies: The main policy tools include fully cutting policy interest rates, expanding public investment, and rolling out consumer subsidy policies.
• Policies for Encouraging Childbirth, Urban Agglomeration Development, and Migrant Worker Resettlement: These policies focus on boosting population-related consumption drivers and optimizing urban-rural consumption structures.
• Secondary Distribution Policies: This category covers policies aimed at improving the level of social welfare and social security, as well as measures to regulate income and wealth distribution.
• Policies to Enhance Residents’ Financial Services: Specific measures include supporting the development of consumer credit, increasing equity dividend payouts, and fostering the development of pension insurance finance.
• Industrial Policies: The key measures here are unlocking the development potential of the service industry and phasing out local protectionist subsidies. These efforts will help drive overall income growth, improve primary income distribution, and support long-term consumption growth in the future.