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 growth. This high-paced expansion has allowed China to integrate deeply into the global economy, contributing to an increasingly interconnected international cycle. As 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 consumption. Addressing the critical issue of insufficient effective demand has become a primary focus for the central government. In a December 2023 economic work conference, officials emphasized the pressing need to stimulate effective demand and tap into latent consumption capabilities. By 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 strategies. The landmark entry into the World Trade Organization (WTO) in 2001 accelerated the nation’s integration into global economic dynamics. Subsequently, the global financial crisis of 2008 further underscored China's role within the international economic context. This 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. 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 Japan. This industrial evolution fostered rapid economic growth alongside continual upgrades in production capabilities. Investment 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 targets. During 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 supply. For nearly three decades following the reforms, these conditions were largely satisfied. However, 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 thereafter. The 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 pronounced. The initial decades of reform witnessed a robust integration into international markets, with domestic and global demands flourishing harmoniously. However, post-2008, the long-term stagnation of the global economy revealed surplus production capabilities. By 2012, the emergence of excess capacity has prompted concerns within the Chinese economic framework.
Lastly, effective demand insufficiency has surfaced as a predominant concern. Following the disruptions caused by the COVID-19 pandemic, the anticipated surge in consumption did not materialize, instead, highlighting the pronounced disparity in effective demand. In December 2022, the central economic work conference specifically identified “insufficient overall demand as the prominent contradiction in current economic operations.” Effective demand pertains to the willingness and ability of consumers to purchase goods and services. This dual requirement suggests that both desire and purchasing power critically affect demand levels. In this context, while both factors significantly impact effective demand, it is the lack of purchasing capacity that fundamentally restricts its growth potential.
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