Expanding Domestic Demand Requires Coordinated Efforts on Both Supply and Demand

Expanding domestic demand is a fundamental cornerstone and a long-term strategic orientation for ensuring sustained and healthy economic growth in China. The fourth plenary session of the 20th CPC Central Committee held in October 2025 identified insufficient effective demand as one of the major risks and challenges facing China’s economy, emphasizing the need to pursue a strategy of expanding domestic demand. The Central Economic Work Conference held at the end of 2025 noted that the imbalance between strong supply and weak demand had grown acute. At present, insufficient domestic demand has become a prominent bottleneck affecting national economic flows. Firmly implementing the strategy of expanding domestic demand requires both being grounded in the present and maintaining a long-term perspective. Therefore, we need to make coordinated efforts on both the supply and demand sides, so that new demand can drive new supply and new supply, in turn, can generate fresh demand. This will promote positive interplay between consumption and investment and between supply and demand, so as to enhance the internal momentum of the domestic economy and ensure its reliable performance.

I. Maintaining a dynamic balance between aggregate supply and demand as an essential requirement for the healthy operation of the socialist market economy

Since the launch of reform and opening up in 1978, the relationship between supply and demand in China has undergone complex changes. Economic policy has shifted between the supply side and the demand side in response, thereby sustaining the economy’s forward momentum. Before the mid-to-late 1990s, China operated as a supply-constrained economy, in which aggregate demand persistently exceeded aggregate supply. The focus of regulation at the time was therefore on managing aggregate demand, curbing inflation, and stabilizing market prices. From 1998 to 2012, successive shocks from the Asian financial crisis and the global financial crisis led to the emergence of insufficient domestic demand. Aggregate supply exceeding aggregate demand became the principal problem in China’s economic operation, and accordingly, policies became more focused on maintaining stable economic development and expanding domestic demand.

Since the 18th CPC National Congress in 2012, China’s economic development has entered a new normal, and the principal problem in the economy has shifted from insufficient aggregate demand to the supply structure failing to adapt to changes in the demand structure. With the supply side identified as the principal dimension of this problem, supply-side structural reform was accordingly elevated to the central task of macroeconomic regulation, gradually redressing the structural imbalance between supply and demand. From 2020 onward, both supply and demand have faced pressure under the profound impact of changes in both domestic and international environments, giving rise to new dynamics in the supply-demand relationship.

Passengers experience the distinctive cultures of Beijing and Tianjin aboard the Tianjin Fantasy Express on its first day of operation. The themed train running from Tianjin North Railway Station to Beijing Railway Station officially began operation on January 1, 2026, with the aim of promoting coordinated development of culture and tourism between Beijing and Tianjin. PHOTO BY XINHUA REPORTER ZHANG FAN

At present, the most pronounced problem in the relationship between aggregate supply and demand is strong supply against weak demand, primarily manifested in a sustained gap between effective aggregate demand and potential economic output.

On the consumption side, the problem is mainly reflected in a relatively low share of household consumption in GDP and a limited proportion of services consumption. In recent years, the contribution of final consumption expenditure to economic growth has fluctuated significantly, remaining below 60% in most years, while household consumption as a share of GDP stands at around 40%, which is 10 to 30 percentage points lower than that of developed countries. A more granular analysis reveals that the gap in household goods consumption between China and the average level of other countries, or even that of developed countries, is not particularly wide. The real gap lies in services consumption, including education, medical care, household services, eldercare, and culture and tourism.

On the investment side, the problem manifests itself as weakening investment momentum, a declining marginal return on capital, and notably weak private sector investment confidence. Private fixed-asset investment (excluding rural households) has fallen below 50% of total national fixed asset investment (excluding rural households). Meanwhile, the investment structure still needs optimization. Compared with investment in physical capital, spending on social welfare and human development remains insufficient.

The imbalance between strong supply and weak demand is not merely an aggregate imbalance but also a structural one. It cannot be reduced to insufficient demand alone. We must also recognize that poor alignment between supply and demand has led to insufficient tapping of effective demand potential. As the supply side shifts from quantity to quality, the structure of supply for some products and services no longer matches demand, resulting in simultaneous excess capacity in traditional sectors and insufficient high-quality supply.

Although this imbalance is normal, if the imbalance of strong supply and weak demand continues to intensify, it will generate systemic harm across multiple dimensions of the national economy. At the macro level, it leads to increased economic volatility, persistently low price levels, and the accumulation of development risks. It also reduces the efficiency allocation of production factors, constraining the release of economic potential. At the micro level, it fuels excessive competition with diminishing returns among enterprises, continuously narrows profit margins, and leads some enterprises to fall into operational distress. Of greater concern, insufficient effective demand and unstable development expectations further dampen corporate investment appetite and innovation drive, hindering industrial upgrading and the development of new quality productive forces. This not only affects near-term economic recovery and growth but also constrains the underlying stability and long-term growth potential of the domestic economy, thereby compromising high-quality economic development over the medium and long term.

II. Understanding the causes of strong supply and weak demand

Looking at the production system and supply capacity, strong supply stems from the development of China’s modern industrial system, enhanced technological innovation capacities, and rising productive forces driven by new industrialization and digitalization, all of which have disrupted the previous supply-demand balance. Looking at market conditions and shocks on the demand side, weak demand has emerged as effective demand expansion failed to keep up with supply expansion, due to the severe impact of the once-in-a-century pandemic of Covid-19, the deep adjustment in the real estate sector, profound changes in the international trade and economic environment, and the near-end of the stage of wave-like consumption. This problem, however, is intrinsic to the process of development and progress. Considering these two dimensions together, the imbalance of strong supply and weak demand can be attributed mainly to the following three underlying causes.

First, the imbalance of strong supply and weak demand is associated with long-standing patterns of public resource allocation and the development trajectory

Over an extended period, during which China’s production capacity remained relatively underdeveloped, local governments preferred expanding investment and raising production capacity when allocating public resources, with a relatively low share going to social welfare and household consumption. This development model drove rapid improvements in production capacity at a specific historical stage. However, as domestic demand growth failed to keep pace, a supply-demand gap emerged. After accession to the World Trade Organization in 2001, China became deeply engaged in the international division of labor and integrated with the global economy, forming a development model where both markets and resources were mostly located abroad. Domestic production capacity was absorbed through global markets, and thus a temporary balance between supply and demand was achieved. Of course, this balance—achieved primarily through reliance on external demand—was inherently fragile.

In recent years, the momentum for global economic growth has flagged, and the external environment has turned increasingly complex, severe and uncertain. The World Trade Organization projects global merchandise trade growth of just 0.5% in 2026, well below the historical average. As the world’s largest merchandise trader, China has faced a marked weakening in the global economic momentum underpinning its development model based on large-scale trade, with both markets and resources located abroad. The structural contraction of external demand has become a long-term trend. In the near term, however, it will be difficult for domestic demand growth to fully replace or offset the gap left by shrinking external demand, causing the supply-demand imbalance to shift from latent to manifest.

Second, China’s transition to a new stage of economic development is affecting the formation of a new supply-demand balance

International experience shows that a country or region’s economic development inevitably goes through a transition from rapid growth to high-quality development. In this process, marginal returns from relying on traditional factor inputs and investment-led growth gradually diminish, and the growth rates of investment and consumption tend to undergo a protracted decline, resulting in a long-term, volatile period of adjustment and transition. China finds itself squarely in the midst of this critical transition period. As industrialization and urbanization enter their middle and late stages, the scope and scale of large-scale infrastructure investment have contracted. The real estate market has undergone deep adjustments, and production of some traditional industries has peaked at a staggered pace. The downward trend in investment directly affects the supply of jobs and the growth of personal income.

At the same time, the previous model formed during the catch-up period, which emphasized production over distribution, has resulted in personal income growth lagging behind economic growth for an extended period. Although this gap has been gradually narrowing in recent years, both the share of labor remuneration in GDP and the share of personal income in national income remain lower than those in most developed economies, affecting residents’ ability and willingness to consume. Furthermore, imitation-driven and wave-like consumption booms among households have basically ended, and consumer demand is shifting from quantity to quality. However, the innovation, rollout, and ready supply of new products that cater to households’ demand for quality and personalization remain insufficient, exacerbating the structural contradiction between supply and demand.

Third, profound changes in fundamental factors such as demographics and technology are exerting long-term effects on the adjustment and rebalancing of supply and demand

Demographically, China as a whole has transitioned from a stage of population growth to one of population decline. Population dynamics are now characterized by falling birthrates, population aging, and diverging regional population increases and decreases. These trends have brought a structural impact on the macroeconomy, directly shaping the adjustment and balance of supply and demand. Experience from some countries shows that negative population growth or more pronounced population aging tends to dampen aggregate demand, especially consumer demand.

Viewed through the lens of technology, the new round of technological revolution and industrial transformation, represented by artificial intelligence (AI), is gathering pace. Its effect dwarfs that of previous technological evolutions, having a more profound bearing on the balance between supply and demand. AI and the industrial innovations it drives have spawned new categories of consumer goods and business forms, broadening available supply. This has not only generated new demand, but also fueled its further expansion. It must be equally recognized, however, that technological innovation is inherently disruptive. It is capable of destabilizing established economic structures and social equilibrium, and potentially triggering short-term economic fluctuations. For instance, the displacement effect of technological advances on traditional employment is becoming increasingly visible. Structural employment issues are growing more pronounced, as employment and income of certain groups are adversely affected in the short run, which in turn constrains the release of demand potential.

III. Promoting a higher-level dynamic balance between supply and demand

A defining feature of major economies is that domestic demand serves as the primary driver, and the economy can sustain its own internal flows. In recent years, China has vigorously implemented its domestic demand expansion strategy, progressively consolidating the role of domestic demand as the principal engine of economic growth. However, the imbalance between strong supply and weak demand constraining the smooth operation of the economy remains relatively prominent. In light of this, during the 15th Five-Year Plan period (2026-2030), we should anchor our policies in the strategy of expanding domestic demand, while coordinating this approach with further supply-side structural reform. This requires sustained, coordinated efforts on both supply and demand, better adapting supply to demand, and strengthening the balance between them, so as to create more models of economic growth that are led by domestic demand, driven by consumption, and sustained by self-generating momentum.

Making coordinated efforts on both the supply and demand sides

Supply and demand are not mutually exclusive alternatives where advancing one entails abandoning the other. To address the imbalance between strong supply and weak demand, we need to press ahead with initiatives on both sides in tandem. On the demand side, it is essential to take a holistic approach to boost employment, raise incomes, and keep expectations stable; refine the systems and mechanisms designed to encourage consumption while removing unreasonable restrictions on consumer spending; and optimize the institutions and mechanisms that enable government investment to drive nongovernmental investment. We must also cultivate stronger consumer demand underpinned by income growth, greater investment demand based on reasonable returns, and broader financial demand that operates within the bounds of principal and debt sustainability. At the same time, it is necessary to further supply-side structural reform. This requires us to stimulate industrial innovation through technological advancement, steer the development of new quality productive forces, and move faster to modernize the industrial system. By doing so, we will elevate the quality and efficiency of the supply system, so as to adapt to and meet existing demand as well as generate and shape new demand through high-quality, self-supporting, and risk-resilient supply. In addition, we should launch capacity-expanding and quality-upgrading programs in the service sector to spur its sound and efficient development. Finally, we should fully harness digital technologies such as big data and AI to build supply-demand matching platforms, facilitating precise alignment and efficient coordination between the two.

Fostering positive interaction between consumption and investment

Consumption and investment are the two core components of domestic demand. Generally speaking, investment is a fast variable, capable of rapidly stimulating demand and maintaining overall economic stability, whereas consumption is a slow variable that calls for long-term cultivation and sustained efforts. At present, expanding domestic demand hinges on sound interplay between the two.

On the one hand, we should remain committed to improving living standards while increasing consumer spending, and investing both in physical assets and human capital. To this end, it is necessary to optimize the structure of government investment and allocate a larger share of it to public wellbeing projects; make high-quality progress on the implementation of major national strategies and the building of security capacity projects in key sectors; and continue to optimize the business environment, invigorate private investment, and fuel the growth momentum of market-driven effective investment. On the other hand, we should roll out a campaign aimed at creating more stable, better-quality job opportunities, along with an income growth plan for urban and rural residents. Meanwhile, special measures should be adopted to boost consumption, which include optimizing the implementation of policies on large-scale equipment upgrades and consumer goods trade-in programs; stepping up inclusive policies that directly benefit consumers; and nurturing new forms, models, and scenarios of consumer spending to unlock the potential of services consumption.

A new material used in simulated skin for robots is on display in a local company specializing in polymer materials in Longkou City, Shandong Province, July 2, 2025. PHOTO BY XINHUA REPORTER XU SUHUI

Pursuing both policy support and reform and innovation measures

As short-term policies alone cannot fundamentally address the imbalance between strong supply and weak demand, it is imperative to organically integrate stronger policy guidance with in-depth reform.

On the policy front, we should ensure alignment between all policies, whether economic in nature or not, and whether already in place or newly introduced. We need closer linkage between fiscal and monetary policies and greater synergy across policies concerning industry, pricing, employment, consumption, investment, trade, regional development, environmental protection, and regulation. Furthermore, we need to strengthen macroeconomic expectations management to shore up public confidence and guide market expectations.

On the reform front, it is important to take the following actions: put in place sound mechanisms for expanding domestic demand through more rational institutional arrangements that properly guide consumption, savings, and investment; improve the income distribution system by building an institutional framework under which primary distribution, redistribution, and tertiary distribution are well coordinated and mutually complementary; eliminate bottlenecks and obstacles hindering the development of a unified national market to secure faster progress in establishing a high-standard market system that is unified, open, competitive, and orderly; rein in rat race competition to unleash market vitality; and move faster to enhance the mechanisms for market-based allocation of production factors, break down institutional barriers to factor mobility, and channel more resources and production factors into areas with efficient supply and effective demand.

Ensuring better interplay between domestic and international economic flows

Given that domestic and external markets are inherently interdependent and mutually reinforcing, expanding domestic demand is by no means sidelining external demand. Rather, it involves tapping into the potential of domestic demand to forge closer links between the domestic and international markets, thus making fuller use of the two markets and their resources.

On the one hand, we should capitalize on the strengths of China’s enormous market and formidable production capacity to anchor the domestic economy firmly on domestic demand. This will enable a virtuous cycle of production, distribution, circulation, and consumption that relies primarily on the domestic market. At the same time, we need to attract global production factors via China’s resilient economy, and bolster our capacity to allocate these production factors worldwide, in a bid to seize greater strategic initiative in pursuing open development.

On the other hand, in response to the evolving international landscape, we should employ a more proactive opening up strategy. This means not only steadily expanding opening up at the institutional level and safeguarding the multilateral trading system, but also engaging more deeply and extensively in the global industrial division of labor and cooperation, notably collaboration across industrial and supply chains, and driving global demand with high-quality supply. In this process of high-standard opening up, we should also open the service sector wider in an orderly manner to effectively release the potential of trade in services.

Tu Shengwei is Researcher at the Institute of Industrial and Technological Economics under the National Development and Reform Commission.

(Originally appeared in Qiushi Journal, Chinese edition, No. 4, 2026)