Crowds of shoppers at the Qingzhou Ever-bright City scenic spot in Qingzhou, Shandong Province, on Oct. 3 Photo: Chen Mirong/CSST

Expanding domestic demand is a strategic decision that China has made for building a new development pattern in the new development stage. High-quality economic development entails an organic combination of high-quality supply and effective demand. In practice, this means improving the supply quality while developing domestic demand, thereby strengthening the national economy’s endogenous force for growth. 

Logic and necessity 

The strategy of expanding domestic demand aims to cope with changes in domestic and global environments and adapting to the evolution of the economic development stage. The intrinsic logic lies in leveraging the advantage of China’s super-large economy, building a new development pattern with smooth circulations at home and abroad, adjusting development strategies to realities, responding to international political and economic fluctuations, and adapting to the transformation of economic drivers. 

China’s growing economic size has laid a foundation for domestic demand’s expansion. As continued growth has increased the Chinese economy’s share of the global economy to 18.5% in 2022, China has become the largest trader in goods and second-largest consumer market globally. The expanded economic size and rising share of the world economy indicate that in the trade-off between domestic and international circulation, more economic activities will take place within China, so domestic demand’s role in supporting economic development is growing. 

The super-large scale of the economy and a sizeable domestic consumer market together have provided multiple parallel tracks for competition among enterprises in terms of market and technology, creating a vast market space for their R&D and innovation. Facilitating enterprises’ professional and differentiated development will inspire them to increase investment and promote consumption upgrade. China’s advantages of a super-large scale in domestic market demand, industrial system, human resources, and physical and institutional infrastructure have paved the way for expanding domestic demand. 

Expanding domestic demand is a strategic move for building a new development pattern of dual circulation. Dual circulation has always characterized the Chinese economy, but the new development pattern of dual circulation is different from the previous model. Although opening-up with higher standards remains vital, changes in economic drivers and demand structure require China to tailor the domestic and international circulation. 

On one hand, China has taken the technological lead in many fields and accumulated sufficient funds with an increasingly sound market mechanism. It is building an open national unified market which encourages orderly competition, and driving the economy to transition from “globalization away” to “globalization at home.” On the other hand, in the circulation of social reproduction, covering production, distribution, exchange, and consumption, inadequate effective demand is the main inhibitor to enlarging economic reproduction, so expanding domestic demand is key to smoothing the circulation of social reproduction. 

Moreover, the strategic shift from export orientation to an emphasis on domestic demand also calls for domestic demand to expand. Strategic decision-making for economic development relies on the economy’s endowments and development stage, and changes in the two aspects should be accompanied by according economic strategy adjustments. Expanding domestic demand is a way to stabilize growth based on the domestic market. It will be conducive to reducing the impact of external political and economic swings, and to enhancing the inherent stability of economic development, thus becoming the strategic choice for promoting high-quality economic development in the new development stage. 

Coping with changes in the international political and economic environment is the extrinsic motivation for expanding domestic demand. Ensuring both development and security, to realize the benign interactions between high-quality development and high-level security, has been a major guideline for the CPC’s state governance. Currently, increasing uncertainties in the international political and economic landscape, such as global geopolitical risks, economic and trade frictions, trade protectionism, backlash against globalization, and supply disruptions for core products, have resulted in less secure global supply chains and mounting economic volatility. 

Playing the pivotal role of investment and the foundational role of consumption by expanding domestic demand to advance high-quality economic development is a crucial channel to mitigate external political and economic impact. The main mechanism includes: improving the degree of independence in science and technology, solving problems related to core technologies, reducing supply disruptions for core products, lowering China’s dependence on the external market, ensuring stable and secure industrial and supply chains, climbing up to the high end of the global value chain, and enhancing the endogenous power and reliability of domestic circulation. 

In addition, expanding domestic demand is necessary to adapting to the transformation of drivers. According to the theory of economic development stages, enlarging the economic size should be the principal goal of growth during the early stage of development, while improving people’s wellbeing should be the primary pursuit in the mature stage. The predominant economic driver generally evolves from investment to domestic demand, and further to consumption. 

China has gone through a relatively long period of investment-driven development and has yet to reach the consumption-driven stage. It is expected to remain in the domestic demand-driven stage for a long time. As the nation’s principal social contradiction evolves, accelerating consumption upgrade and meeting people’s needs for a better life have become main economic objectives in the new development stage. 

To comply with the evolutions of economic stages and drivers, advancing high-quality development needs to gradually strengthen consumption’s basic role in development and steer the economic driver from investment toward domestic demand. Specifically, this is about improving supply quality by expanding effective investment, and unleashing consumer demands by fueling consumption upgrade. The aim is to rectify structural mismatches between domestic supply and demand, thus attaining a high-level, dynamic supply-demand equilibrium. 

To ensure high-quality economic development in the stage driven by domestic demand, it is essential to simultaneously enhance consumption’s foundational role in development and capitalize on the key role of investment in optimizing the supply structure. China currently needs to focus on properly handling problems such as expanding effective investment, tapping into consumption potential, and promoting better alignment between consumption and investment. 

Expanding effective investment

China is in the rapid development stage marked by urbanization and informatization, with huge investment space and demand potential. Investment remains an important driver of economic development, so expanding effective investment is a material channel for optimizing the supply structure and advancing high-quality economic development. 

To expand effective investment, attention should first be paid to investment efficiency. It is necessary to combine the expansion of domestic demand with supply-side structural reform, to improve investment quality through supply-side structural reform, by increasing investment in new forms of infrastructure, lifting the level of traditional infrastructure, investing further in strategic and emerging industries, and accelerating major engineering projects. 

Second, effective investment in manufacturing should be increased by promoting digital transformation and upgrade of the industry. Greater support should be lent to sci-tech innovation, and to specialized and sophisticated enterprises that produce new and unique products, with increasing R&D investment in key and core technologies, to boost the core competitiveness of advanced manufacturing. 

Third, the system and mechanism for promoting investment should be optimized. Policy and developmental financial tools can be flexibly utilized to improve the business environment and give full play to business entities’ role in infrastructure investment, thus reinforcing the synergistic effect of governmental and non-governmental investment. 

Unlocking consumption potential

China has a large population with more than 400 million people in middle-income groups, which have immense consumption potential. Consumption is both an approach to meeting people’s needs for a better life and a significant driver for high-quality economic development. Releasing consumption potential first requires income gaps to be bridged. When income gaps are wide, high-income groups with strong spending power have a low propensity to consume, while low-income groups with a high propensity to consume have weak spending power. This will inhibit residents’ full consumption potential. Narrowing the income gap by striving for common prosperity will help elevate China’s overall propensity to consume and maximize household consumption potential. 

In other priorities, raising the social security level is of key importance. The low consumption rate of Chinese residents is largely a result of their low willingness to spend and strong motivation to save. This stems from inadequate social security. Augmenting the supply of public goods and services like affordable housing, education, and medical insurance to eliminate worries from consumption will make residents more willing to spend and unlock their true consumption potential. 

The consumption environment should also be optimized. In terms of consumer market and business order, particularly in new models of consumption, infringements upon consumer rights still occur from time to time, which naturally dampens consumption. It is vital to strengthen the protection of consumers’ rights, to create a secure consumption environment, and to raise their expectations for spending. 

Additionally, the product supply quality should be improved. Consumption outflow reveals a mismatch between product supply quality and the demand for consumption upgrade in China. It is advisable to increase the supply of mid- and high-end products and strengthen branding to create new demand through high-quality supply and enhance the compatibility of the supply system with domestic demand. 

Consumption and investment

In the development stage driven by domestic demand, the alignment between consumption and investment is critical. It is neither practical to implement a consumption-driven economy too early, which will lead to a society with low consumption levels, nor rest on the investment-driven model that will result in low-quality development featuring “growth without development.” 

Promoting better alignment between consumption and investment first necessitates efforts to let demand pull supply and consumption guide investment. Consumption upgrade will usher in the upgrade of industrial structures. An increase in consumers’ demand for commodities of mid- and high-end brands entails better product supply quality and more investment in branding. 

Second, consumption relies on investment. Without investment growth, consumption growth will not be sustainable. In addition, we should realize a high-level, dynamic equilibrium between supply and demand. High-quality economic development requires the provision of high-quality products and services to the market on the supply side, as well as the promotion of upgrade in consumption structure and the satisfaction of people’s needs for a better life on the demand side. The match and high-quality, dynamic equilibrium between supply and demand is the objective of coordinating consumption and investment. 

Sun Hao is a research fellow from the Research Center of Modern Business and Trade at Zhejiang Gongshang University.  

Edited by CHEN MIRONG