Thoroughly Understanding the Strategic Requirement of Expanding Domestic Demand

Steadfastly implementing the strategy of expanding domestic demand is vital for ensuring the sound, steady, and long-term growth of China’s economy. At its fourth plenary session, the 20th Central Committee of the Communist Party of China (CPC) set forth strategic plans for expanding domestic demand, while the Central Economic Work Conference identified “expanding domestic demand and building a robust domestic market” as the first of the eight key tasks for economic work in 2026.

I. How to understand expanding domestic demand as a strategic underpinning?

Expanding domestic demand is a fundamental cornerstone and a long-term strategic policy for sustaining sound economic growth in China. It should serve as our strategic underpinning for several reasons.

First, it is in keeping with China’s basic national conditions—a vast population and an enormous economy

A defining feature of major economies is that they are driven primarily by domestic demand and can achieve complete domestic circulation. This is clearly evident from the development trajectories of major economies around the world. The United States offers the most striking example: Its massive consumer market—accounting for roughly 70% of economic output—has provided the bedrock for its economic stability and sustained its global influence. On the contrary, while the economies of Germany and Japan took flight after World War II through an export-oriented model, the limitations of their over-reliance on external demand became apparent as they ascended the ranks of leading economies. Direct exposure to global volatility and trade frictions significantly amplified their risks from external shocks. This illustrates that to reach a higher level of development, major economies must fully shift from relying on external demand to being driven primarily by domestic demand.

Following China’s launch of reform and opening up in 1978, its economic strength rose rapidly as the country integrated into the global economy. In the late 1990s, however, the Asian financial crisis awakened China to the risks of relying too heavily on external demand. In the wake of the international financial crisis in 2008 and Covid-19 in 2020, China has become keenly aware that as a vast economy, it cannot afford to base its development on an uncontrollable and volatile external market. Only by building a robust and complete domestic demand system can it provide stable support for unimpeded economic flows and sustained momentum for industrial upgrading and technological progress. As such, expanding domestic demand is a strategic choice grounded in a profound understanding of the objective laws underlying economic and social development. More crucially, it is the only sure path to modernization for a major country like China.

Second, it is fundamentally what enables China to weather the storm and secure the initiative in a complex and changing landscape 

At present, momentous changes of a magnitude not seen in a century are unfolding across the world at a faster pace, and unilateralism and protectionism are on the rise. Certain countries have repeatedly provoked trade disputes, imposed “reciprocal tariffs” on others, and strategically pushed for the decoupling of critical industries and delinking of industrial and supply chains based on a “small yard, high fence” policy. These actions have created havoc in global industrial and supply chains, putting tangible pressure on China’s external markets and economic security. Meanwhile, the slowdown in global growth and the spillover of geopolitical risks are compounding each other, transmitting pressures to the domestic economy through multiple channels such as trade, investment, finance, and market expectations, making it even more difficult for China to maintain steady and sound economic growth. 

The more complex and volatile the situation becomes, the more we must recognize that domestic demand is not only the strategic backbone of our domestic economy but also a core strength for China in participating in and shaping international economic flows. China must ground its development in its own strength. Only by cultivating robust and stable domestic demand can it truly create a new development dynamic that is focused on the domestic economy and features positive interplay between domestic and international economic flows. This is what will enable China to effectively withstand external shocks and continuously enhance the resilience, competitiveness, capacity for development, and sustainability of its economy.

Citizens watch a live broadcast of the “Jiangsu Super League” match in a shopping mall in the city of Nantong, Jiangsu Province, June 29, 2025. The “Jiangsu Super League” has become a nationwide hit as an IP sporting event, which vividly demonstrates the strengths of China’s enormous market. PHOTO BY XINHUA REPORTER LI BO

Third, it is a concrete manifestation of improving wellbeing among our people and an intrinsic driver of high-quality development 

Ultimately, we pursue economic and social development to meet the people’s growing needs for a better life. At present, the imbalances and inadequacies in China’s development remain pronounced. There are notable shortcomings in areas such as employment, education, healthcare, eldercare, and childcare. Moving faster to tackle these public concerns represents the most direct means of expanding domestic demand. Moreover, people’s needs are quickly becoming less focused on availability and more on quality. New trends are emerging around individualization, quality, services, and digitalization, and with this, real demand for higher-quality goods, more diverse services, and a more livable environment is growing. By working to meet and guide this demand, we can not only directly create jobs and improve people’s lives but also steer upgrades in the supply system, thereby effectively turning people’s aspirations for a better life into a powerful engine for economic transformation and upgrading. 

Expanding domestic demand is not merely an important means of driving economic development but an ultimate aim of it. By making the people’s needs for a better life the underlying basis for expanding domestic demand, we can both improve living standards and generate an inexhaustible source of vitality for high-quality economic development.

At present, China is home to over 1.4 billion people, 190 million business entities, and a vast middle income group, making it an enormous market with unmatched potential. With the world’s most complete industrial system, a steadily growing capacity for technological innovation, and a wealth of human resources, China is well-positioned to make the most of this enormous market. Through the strategy of expanding domestic demand, it can translate this unique advantage into momentum and capacity for driving development and withstanding risks and lay a solid and sustainable strategic foundation for its modernization.

II. Why has insufficient domestic demand become a prominent issue?

In recent years, through vigorous efforts to expand domestic demand, China has strengthened domestic demand as a major driver for economic growth. However, the gap between supply and demand remains a major factor impeding smooth flows in the economy.

Insufficient domestic demand has emerged as a prominent issue in economic development primarily because effective aggregate demand has consistently undershot potential economic output. Beyond impeding national economic flows, this gap has heightened cautious expectations among businesses and individuals by suppressing employment and income growth. It has thus become a key constraint on the economy’s return to potential growth. 

On the consumption side, this has weighed on individuals’ appetite for spending and kept precautionary savings high. In recent years, final consumption expenditure as a share of economic growth has fluctuated significantly, falling below 60% in most years, well short of the 70-80% or higher figure consistently seen in developed economies. 

On the investment side, this has manifested itself as a structural slowdown, with private sector confidence notably weak. In 2023 and 2024, private fixed-asset investment in China fell by 0.4% and 0.1% respectively. In reality, some private enterprises are afraid, unwilling, or unable to invest. 

Price signals also tell a similar story. As of November 2025, the national consumer price index (CPI) had recorded year-on-year growth of less than 1% for 33 consecutive months, while the producer price index (PPI) had posted negative growth for 38 consecutive months. These figures illustrate the severity of the domestic demand problem.

Insufficient domestic demand stems from a variety of factors, including cyclical issues, structural contradictions, and institutional influences. 

Objectively speaking, marked shifts in population size and structure and major changes in supply demand dynamics of the real estate market have caused a slowdown in housing consumption, real estate investment, and related sectors. These are pains common to many economies undergoing transformations during the later stages of industrialization. At the same time, it has been difficult to maintain steady income growth and consumer confidence as affected by structural shifts in global industrial chains, the displacement of traditional jobs by technology, and the pressure for structural upgrades in certain industries. 

From an institutional perspective, potential consumer demand has not yet been effectively unleashed due to problems restricting consumption in certain sectors and relatively underdeveloped policy and legal support for service consumption. On the investment front, deep-seated issues in the business environment around market access and fair competition have, to some extent, dampened the enthusiasm of private investors. 

At a more fundamental level, China’s income distribution structure remains imbalanced. This is manifested in several important ways: personal income accounts for a relatively low share of national income, and labor remuneration in primary distribution remains inadequate; redistribution mechanisms have played a limited role in narrowing income disparities, while the social security system requires improvement; and tertiary distribution remains underutilized as a means to improve income and wealth distribution. As a result, significant income gaps remain across different groups, with a lack of spending power among the middle- and low-income cohorts, undermining the sustained expansion of domestic demand. 

The laws underlying economic work stipulate that a dynamic equilibrium between aggregate supply and aggregate demand is a basic precondition for steady and sound growth. To address the present challenge—a pronounced imbalance between supply and demand in the domestic market—we must adopt a systematic approach and coordinate efforts to expand domestic demand and deepen supply-side structural reform. Our aim should be to achieve a more desirable, dynamic equilibrium in which demand both drives and is created by supply. 

To this end, it is crucial to strengthen demand-side management and build a complete domestic demand system as soon as possible by creating stronger consumer demand on the basis of growing incomes, more robust investment demand supported by reasonable returns, and broader financial demand within the constraints of capital and debt. At the same time, we must press ahead with supply-side structural reform and address structural mismatches between supply and demand in certain sectors. This involves fostering self-supporting, risk-resilient, and high-quality supply that not only meets existing demand but also has the capacity to generate and steer new demand. Only through synergy between the supply and demand sides can we propel sound flows in the national economy and resolve this prominent issue in economic development at present.

Skiing enthusiasts pose for a photo at Lake Songhua Resort in the city of Jilin, Jilin Province, November 22, 2025. In recent years, winter sports have not only contributed to improving the lives of our people, but also become a new driver of consumption, contributing to economic growth. PHOTO BY XINHUA REPORTER YAN LINYUN

III. Why should investment in physical assets and human capital be closely integrated?

Domestic demand consists of both consumption and investment—two forces that are interconnected and mutually reinforcing. To expand domestic demand, therefore, we must fully leverage both the fundamental role of consumption and the pivotal role of investment and foster positive interplay between the two.

In 2023, at the first meeting of the 20th Central Financial and Economic Affairs Commission, President Xi Jinping introduced the original notion of “closely integrating ‘investment in physical assets’ with ‘investment in human capital.’” This imperative was reaffirmed at the recently concluded Central Economic Work Conference. Going forward, investment in human capital should serve as a primary lever in our efforts to unlock consumption potential and guide effective investment, so that we can steadily consolidate the foundation of domestic demand and strengthen the internal drivers of development.

Investment in human capital means directing greater resources to areas vital to people’s wellbeing—such as education, employment, healthcare, and social security—and to initiatives that build individual capabilities, safeguard health, advance career development, and unlock human potential. This strategy aims to drive high-quality economic development by unleashing consumption potential and elevating human capital. 

Introduced as a counterbalance to “investment in physical assets,” the concept embodies an investment philosophy that prioritizes people over material accumulation. It represents a refinement of past approaches to investment, production capacity expansion, and indeed, development as a whole. For decades, China’s economy has been propelled by factor inputs and investment-led expansion, yet returns on physical asset investment have been diminishing in recent years. As global industrial competition shifts from capital-intensive to talent-intensive models, China needs to transform its growth drivers so that development becomes innovation-driven and demand-led. All this creates a pressing need to scale up investment in people in order to promote the accumulation of human capital and generate a “human capital dividend.” Only by making such a transition can China achieve enduring competitiveness and seize the strategic initiative in the new round of technological revolution and industrial transformation.

Investment in human capital is vital for expanding domestic demand and achieving high-quality development. In recent years, household consumption in the country has accounted for around 39% of GDP, while gross capital formation has made up about 41%. By comparison, global household consumption averages around 57% of GDP, with gross capital formation at about 27%. China thus faces a dual challenge in boosting domestic demand: insufficient household consumption and a yet-to-be-optimized relationship between consumption and investment. Investment in human capital serves as a crucial lever for fostering precisely this type of positive interplay. At its core, it is about boosting investment for people’s well-rounded development and enhancing both human capital and public wellbeing, so as to bridge the gap between supply and demand and between investment and consumption, thereby fueling the intrinsic drivers of growth. 

In practical terms, strengthening public services and social security in domains such as education, healthcare, eldercare, and childcare can significantly reduce household financial burdens in critical areas. This alleviates worries that inhibit consumer spending and frees up precautionary savings, so that a greater share of current income can be used for immediate consumption. Meanwhile, it steers consumption toward higher-quality, more personalized, and more service-oriented experiences. The unleashing of household consumption potential and upgrading of consumption patterns will provide the supply system with clearer market signals and stronger demand-side pull, spurring enterprises to accelerate technological innovation and product iteration. The result of all this will be an economic development model that is increasingly led by domestic demand, propelled by consumption, and sustained by internal momentum.

At the same time, it should be noted that emphasizing human capital investment by no means implies neglecting or diminishing physical asset investment. Rather, the goal is to achieve closer integration of the two. 

On the one hand, China’s per capita capital stock remains below that of developed countries, leaving substantial room for continued investment in physical capital. What is needed, however, is a shift from the scale expansion of the past to improvements in quality, efficiency, and precision. Efforts should be focused on bolstering weak links in core technologies in key fields, putting underutilized assets to best use, planning for new types of infrastructure, and strengthening security capacities in areas such as food, energy, and industrial backup systems. Such measures will ensure that we keep consolidating the resilience and foundation of national economic security and development. 

On the other hand, sustained efforts should be devoted to the key priorities of human capital investment. We must continue making steady progress toward equal access to basic public services, raise the share of government investment devoted to public wellbeing initiatives, and expand public investment across a range of areas, such as childbearing, parenting, education, healthcare, vocational training, inclusive eldercare, culture, and sports. Furthermore, greater investment should be channeled to human resource development and well-rounded personal growth, following an integrated approach that coordinates the development of education, science and technology, and human resources. This will fully unleash the enthusiasm, initiative, and creativity of all sectors of society for advancing human capital investment.

IV. How can long-term mechanisms for expanding domestic demand be strengthened?

Expanding domestic demand requires not only proactive and effective macro policies but also long-term mechanisms. In recent years, China has taken coordinated steps to develop these policies and mechanisms, including formulating the Outline of the Strategic Plan for Expanding Domestic Demand (2022-2035), launching several major initiatives for driving industrial transformation and upgrading through promoting consumption, and helping facilitate the healthy growth of private investment. These moves have steadily enriched in practice the suite of policies designed to expand domestic demand. The following are examples of areas where efforts should be focused going forward.

First, the income distribution system should be improved 

Consumption is a function of income, and income remains the single most important determinant of consumer spending. Coordinated action is required across the stages of primary, secondary, and tertiary distribution in order to create an olive-shaped income distribution structure that is anchored by a large middle-income group. 

In primary distribution, the focus should be on addressing structural employment issues. This requires both promoting labor market development and improving employment-related systems to achieve optimal human resource allocation. It involves refining the mechanisms for setting wages, promoting reasonable wage growth, and guaranteeing payment, while also raising the share of labor remuneration in primary distribution. 

In secondary distribution, policy implementation should be bolstered through taxation, social security, transfer payments, and other means, with the goal of providing more extensive and higher-quality basic public services to all residents on an equitable basis. 

In tertiary distribution, guidance and support should be provided to encourage willing enterprises and social groups to actively participate in public welfare and charitable initiatives. This requires creating an institutional environment that both incentivizes and regulates the development of welfare and charitable endeavors.

Second, institutions and mechanisms geared toward building a robust domestic market should be put in place

As the vital link between supply and demand, the market must be given the decisive role in resource allocation. This means securing faster progress in building a high-standard market system that is unified, open, competitive, and orderly. At present, China’s market system still suffers from institutional shortcomings such as local protectionism, market segmentation, and impediments to factor mobility. These problems limit consumer choice, distort investment signals, and constitute a major cause of structural mismatches between supply and demand. 

To address these challenges, regulations should be formulated for developing a unified national market. With a clear focus on the requirement for “five unifications and one opening up,”* barriers in areas such as factor acquisition, qualification accreditation, public bidding, and government procurement should be dismantled to eliminate local protectionism and market segmentation, thus facilitating the smooth flow of goods and production factors on a broader scale. Predatory pricing and disorderly competition among enterprises should be curbed in accordance with laws and regulations, while unified enforcement should be ensured in market regulation, so as to establish a market order where good quality commands good prices and healthy competition prevails. Both hard and soft infrastructure should be built with the aim of developing a modern logistics system. This includes establishing integrated, well-aligned rules and standards and realizing high-standard connectivity between market facilities in order to lower logistics costs across society. Additionally, institutions and mechanisms for high-standard opening up should be rapidly improved to better connect domestic and international markets and enable mutual reinforcement between domestic and international economic flows.

Third, institutions and mechanisms for promoting consumption should be refined 

At present, significant institutional barriers continue to constrain the expansion and upgrading of consumption. Unreasonable restrictions in the consumer sector must be eliminated, the supply of quality goods and services expanded, and quality standards and credit systems enhanced. 

Some local governments have long overemphasized production at the expense of consumption. This tendency is closely tied to the distribution of China’s value-added tax, which is based on production location. As a result, local government revenues are tied more closely to production and investment activities than to the vibrancy of local consumer markets. At its third plenary session, the 20th CPC Central Committee proposed to reform excise tax collection by shifting it further toward the consumption end, with collection authority gradually delegated to local governments. It is essential to advance this reform in a steady and prudent manner, rolling it out category by category and phase by phase. This will encourage local governments to work harder to improve the consumption environment and stimulate consumption. Beyond this, evaluation and incentive mechanisms should also be improved to encourage local governments to boost investment in consumption-oriented infrastructure. This will provide further impetus for boosting consumption.

* This refers to unifying underlying market institutions, market infrastructure, standards for government conduct, law enforcement in market regulation, and markets for resources and production factors, while continuing to expand internal and external opening up.

(Originally appeared in Qiushi Journal, Chinese edition, No. 24, 2025)