Range of macro tools to keep economy on track

China's strategic priorities for the next five years will center on developing new quality productive forces and boosting domestic demand, according to the recently unveiled Recommendations of the Central Committee of the Communist Party of China for Formulating the 15th Five-Year Plan for National Economic and Social Development.

While it is undoubtedly crucial to concentrate efforts on breakthroughs in cultivating new quality productive forces, a persistent shortfall in domestic demand could further reinforce the current macroeconomic situation of strong supply and weak demand.

The urgency of addressing this issue is emphasized because it has evolved beyond a mere medium — to long-term structural challenge and has arguably become a practical factor constraining current economic development.

What is driving this concern? The dynamic of strong supply and weak demand has been in place for years and is hardly new. The reason this contradiction is being discussed so frequently today is largely because in the past, exports served as a critical outlet by absorbing potential domestic overcapacity.

However, the landscape has undergone profound shifts recently. International market openness has significantly receded as trade barriers continue to mount. At the same time, China has evolved from a relatively small economy into one of global scale. As a result, its exports are now large enough to influence worldwide market balances, prompting concerns among trading partners that a prolonged surge could unsettle their industrial bases, threaten jobs, and strain income distribution.

Given these shifts, the option of relying on rapid export expansion to absorb excess domestic capacity is no longer as available as it once was. Therefore, the imbalance between strong supply and weak demand is becoming more pronounced in the short run. Simply put, there is now less room to offset this pressure through external markets and global trade flows.

To wrap up, the supply-demand mismatch has crossed over from being a chronic issue to an acute, immediate one.

The recent Central Economic Work Conference, in my view, flashed some new signals. The policy stance on supporting growth is likely to be more forceful than anticipated, suggesting that the country will deploy a broader range of macro tools and measures to keep the economy on the track.

As discussed earlier, the two core priorities are developing new quality productive forces and strengthening domestic demand. This emphasis was clearly reflected at the Central Economic Work Conference, which placed expanding domestic demand and building a strong domestic market at the top of its eight key tasks. Innovation-driven development ranked second, with a call to accelerate the cultivation of new growth drivers.

Against this backdrop, boosting domestic demand has become far more urgent. It is no longer a long-term policy objective but a near-term imperative, making the shift in emphasis both timely and consequential. Over the longer term, China's growth model is also evolving. Expansion is being driven less by factor-intensive inputs and more by innovation. At the same time, the economy is moving away from relying on external markets to absorb output and toward drawing more of its momentum from the domestic market.

Therefore, the imbalance of strong supply and weak demand, especially subdued consumer demand, has been a persistent feature of China's economy. The causes are multifaceted, but from an economic standpoint, a few underlying factors are particularly evident.

To begin with, in economies where governments play a strong role in allocating resources, policy priorities tend to lean toward investment. In reality, local authorities' allocation preferences do not always match those of households or the market. This gap has, to some extent, translated into a heavier emphasis on investment, production and supply than on consumption.

A second structural factor is the prolonged surplus of labor during China's earlier stages of development. Many East Asian economies followed a similar export-led, labor-intensive growth path, often seeing a shared pattern: output expanded rapidly, but wage growth lagged behind. This tended to reduce the share of household income in overall national income, and at a certain stage also weighed on the share of consumption.

The real shift usually occurs at what economists describe as the Lewis Turning Point — when surplus labor is fully absorbed and labor shortages begin to appear. Wage growth then accelerates, and consumption tends to pick up gradually.

Furthermore, the still-developing social security framework has also weighed on consumption growth to a certain degree.

Official data show that the trough in consumption's share has already passed, with the ratio rising steadily over the past 15 years. In that sense, it is reasonable to say that consumption is playing a growing role in supporting overall economic growth, and the numbers broadly bear this out.

Admittedly, part of that increase reflects slower growth in investment and exports. Nevertheless, China's consumption share remains relatively low when compared with other emerging markets, indicating that the underlying pattern of strong supply and comparatively weak demand has yet to be fully corrected.

Recently, China introduced a series of trade-in policies and is considering expanding the program. But in the final analysis, lasting growth in consumption will hinge on incomes, social security and confidence.

Restoring balance between supply and demand will rank among the key macroeconomic challenges of the period ahead, posing a near-term test with lasting implications.

The supply-demand imbalance will not be resolved overnight, and the expansion of domestic demand is bound to be incremental. Continued policy support is therefore essential. A comprehensive policy package, instead of isolated measures, will likely be needed, with action taken on several fronts.

First, the market should play a decisive role in allocating resources, with clearer boundaries placed on local government intervention. The involution observed in some sectors reflects not only market forces, but also policy-driven competition at the local level. A priority going forward is to better define the respective roles of government and the market, making clear which responsibilities belong to local authorities and which should be left to market mechanisms.

It is also advisable to reduce the singular focus on real gross domestic product (GDP) growth and give greater policy weight to indicators such as income, employment, consumption and nominal GDP growth.

Second, boosting consumption ultimately depends on stronger incomes and a more solid social safety net. Incentive programs such as trade-in subsidies help in the near term, but they are not a lasting solution. With mounting structural challenges, from aging demographics and local debt risks to property sector strains, and the added uncertainty from rapid advances in artificial intelligence, well-designed public policy, especially at the central level, will be essential to underpin domestic demand.

Third, strengthening the services sector will be key, not only for boosting consumption but also for supporting job creation. Compared with other sectors, services provide broader scope for absorbing employment and unlocking new demand, especially in eldercare as well as childcare, healthcare, cultural and tourism industries, digital services, green development, and education and training.

Finally, high-standard opening-up should remain a long-term priority. In the past, China sustained growth by integrating deeply into global economic circulation. In the long term, however, as a major economy, it will be increasingly important to pursue development through mutual growth with trade and investment partners.

The writer is a member of the China Finance 40 Forum and dean of Peking University's National School of Development.

This article is based on the author's remarks during the release of CF40's 2025 fourth quarter macro policy report in January.

The views do not necessarily reflect those of China Daily.