• Futures News
• February 3, 2025

Consumption to Drive New Growth Model

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Since its initiation in 1978, China's reform and opening-up policy has profoundly altered the country's economic landscape, culminating in over 40 years of unprecedented growthThis high-paced expansion has allowed China to integrate deeply into the global economy, contributing to an increasingly interconnected international cycleAs the nation forges ahead in establishing a new development paradigm, a significant transformation is underway—shifting from an investment-driven growth model to one that is fueled by consumptionAddressing the critical issue of insufficient effective demand has become a primary focus for the central governmentIn a December 2023 economic work conference, officials emphasized the pressing need to stimulate effective demand and tap into latent consumption capabilitiesBy September 2024, the agenda of the meeting highlighted the imperative of linking consumption promotion to improving the livelihoods of the populace, especially targeting low- to middle-income groups to enhance their income capacity and consumption structures

This strategic alignment reflects a keen acknowledgment by the central authorities of the challenges posed by ineffective demand, marking a pivotal shift in their approach towards remedying these economic pressures.

The Chinese growth model, which emerged during the period of reform and opening-up, is often described as "supply creates demand." Throughout this era, China's economy has transitioned from a singular focus on domestic circulation to active participation in the “international circulation.” In 1994, the unification of the RMB exchange rate set the stage for China’s outward economic strategiesThe landmark entry into the World Trade Organization (WTO) in 2001 accelerated the nation’s integration into global economic dynamicsSubsequently, the global financial crisis of 2008 further underscored China's role within the international economic contextThis dual track of internal market reforms and openness to global trade has yielded significant achievements; between 1978 and 2018, China's GDP grew at an astounding average rate of 9.5% per annum

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• Consumption to Drive New Growth Model

By 2023, China had attracted $3.39 trillion in foreign direct investment and channeled $2 trillion in outward investment, illustrating its robust trade engagement.

The process of reform and opening-up effectively encapsulates the principle of “supply creates demand.” During this transformative phase, China capitalized on its abundant labor force by gradually assuming the role of a manufacturing powerhouse for developed economies such as those in North America, Europe, and JapanThis industrial evolution fostered rapid economic growth alongside continual upgrades in production capabilitiesInvestment became a cornerstone of China's economic drive—locally, foreign direct investments were encouraged to boost regional economies, while regionally competitive policies attracted domestic investments aimed at achieving growth targetsDuring economic downturns, the government would employ strategic fiscal and monetary policies to stimulate recovery

Particularly since the commercialization of housing in 1998 and the establishment of the land auction system in 2002, a cyclical model of land leasing, investment attraction, and subsequent growth has effectively propelled the economy.

Nevertheless, the successful execution of a supply-driven demand growth model hinges on at least two critical conditions: first, a sufficient labor supply complemented by a dual economic structure; second, the presence of demand shortage or excess supplyFor nearly three decades following the reforms, these conditions were largely satisfiedHowever, in the wake of the global financial crisis, China has begun to confront challenges that compromise this growth formula, most notably labor supply saturation, oversupply, and diminishing effective demand.

Firstly, concerning labor supply, the labor logistics that once characterized the post-reform era have begun to shift

China's labor force saw a considerable increase from approximately 500 million in 1978 to approximately 780 million by 2015, followed by a notable decline thereafterThe number of migrant workers rose from 225 million in 2008 to nearly 297 million in 2023, yet growth rates have stagnated post-2012. This demographic shift signals the approaching “Lewis Turning Point,” indicating a diminishing impact of the demographic dividend based solely on labor quantity.

Secondly, the issue of oversupply has become more pronouncedThe initial decades of reform witnessed a robust integration into international markets, with domestic and global demands flourishing harmoniouslyHowever, post-2008, the long-term stagnation of the global economy revealed surplus production capabilitiesBy 2012, the emergence of excess capacity has prompted concerns within the Chinese economic framework.

Lastly, effective demand insufficiency has surfaced as a predominant concern