*This article is adapted from a piece by Lu Feng, Professor of Economics at Peking University's National School of Development, published in the New Economist.

The Five Principal Contradictions on the Demand Side

In recent years, the Chinese economy has achieved breakthrough progress in the technological transformation and upgrading of key industries. In many respects, the quality of productive forces and the strength of the supply side have surpassed the developmental stage corresponding to the country’s total economic output and per capita income levels. This new dynamic provides crucial context for observing China’s future economic trajectory and policy choices. Within the current overall supply-demand relationship, insufficient demand is the principal contradiction, manifesting in the following five characteristics.

First, insufficient aggregate demand is the principal contradiction within the overall supply-demand relationship, as growth becomes increasingly reliant on demand expansion. Second, insufficient domestic demand is the principal contradiction within the aggregate demand structure. Third, within domestic demand, the principal contradiction is weak consumption relative to investment. Fourth, within aggregate consumption, weak household consumption is the principal contradiction. Fifth, within household consumption of goods and services, weak service consumption is the principal contradiction.

China's public sector controls substantial economic resources, the allocation of which has long prioritized investment and development to drive technological and productivity advances. However, a relatively smaller proportion has been allocated to social welfare and household consumption. In a market economy, this allocation pattern tends to result in weak final consumption. This often necessitates policy measures such as increased investment, capacity reduction, and increased exports to maintain macroeconomic supply-demand equilibrium. Accelerated catch-up growth and enhanced supply capacity have further accentuated the relative weakness of consumption. On the other hand, the aforementioned policy approaches face constraints of diminishing effectiveness and increasing implementation difficulties. To achieve high-quality growth through better supply-demand balance, the catch-up-oriented public resource allocation model must be optimized and adjusted.

New Circumstances Present Opportunities for Optimizing Public Resource Allocation

The scenario of strengthened supply coupled with subdued consumption offers a tangible opportunity to advance economic development through institutional innovation and structural adjustment. Insufficient demand and weak consumption are systemic, structural, and institutional issues that cannot be resolved in the short term or through cyclical measures alone. During the 15th Five-Year Plan period, the focus must remain on innovation-driven growth and quality enhancement, while also establishing robust consumption stimulation as a strategic objective. This will facilitate a shift in the economic growth pattern from “strong supply and weak demand” to “strong supply and strong demand”, gradually establishing a vast domestic consumer market that matches the enhanced supply capacity.

Regarding the allocation of public resources, it is important to maintain necessary investment levels to support supply-side catch-up and the development of a manufacturing powerhouse, while increasing priority on expenditure for social welfare. This will help stimulate consumption, build a large-scale domestic consumer market aligned with supply capabilities, and create the conditions necessary for achieving preliminary modernization goals by 2035.

Key Focus Areas for Boosting Consumption

Efforts to stimulate consumption should concentrate on the following four aspects:

1. Gradually and appropriately adjusting the allocation of public resources, shifting away from an excessive focus on the supply side to boost final consumption, expand domestic demand, and promote supply-demand equilibrium. More effectively incentivize market entities to innovate, continuously driving technological and industrial catch-up on the supply side. Optimize the assessment mechanisms for local governments, shifting the emphasis from attracting investment to balancing priorities among supply, consumption, production, and people’s livelihoods.

2. Achieving new breakthroughs in equalizing and improving access to public services, driving systemic reforms in related sectors. Expand the scope of central government fiscal responsibilities to improve public service standards for new urban residents, such as migrant workers, in areas including affordable housing, education, healthcare, social security, and elderly care. Substantially raise the basic pension standards for urban and rural residents.

3. Achieving new breakthroughs in modernizing the fiscal and tax systems to refine the fundamental institutional framework for economic governance. Increase the central government’s share of expenditure on public services with universal spillover effects. Further advance tax structure adjustments to optimize incentives and broaden local tax bases. Build upon household registration and agricultural land reforms to steadily advance property tax pilot schemes and legislative processes.

4. Achieving breakthroughs in household registration, agricultural land, and small property rights housing reforms to strengthen institutional conditions for integrated urban-rural development. Accelerate the reform of the household registration system to eliminate the consumption constraints imposed by the dual urban-rural structure. Explore new approaches to homestead land reform to increase rural residents’ property income and expand local fiscal capacity for promoting equitable public services.