China's Economic Development Pattern: The Imperative for A Strategic Transformation
——An exclusive Interview with LIU Shijin, Deputy Director of the Economic Affairs Committee of the National Committee of the Chinese People's Political Consultative Conference (CPPCC)
By GAO Zhanjun and LIU Shijin
In 2024, China's economy demonstrated resilience amid external pressures and internal challenges, experiencing fluctuations while maintaining overall stability and achieving its primary objectives. Notably, the Political Bureau of the Communist Party of China (CPC) Central Committee held a meeting on September 26 and introduced a package of incremental policies, effectively boosting social confidence and fostering economic recovery. In 2025, China faces heightened trade frictions and escalating geopolitical complexities, which may potentially lead to deeper external shocks and a more challenging global trade and investment landscape. Despite these hurdles, the economy continues to navigate through numerous challenges. In an exclusive interview with China Forex, LIU Shijin, Deputy Director of the Economic Affairs Committee of the 13th Chinese People's Political Consultative Conference (CPPCC) and former Vice President (Vice Minister) of the Development Research Center of the State Council, shared insights on the issues such as the underlying causes of insufficient domestic demand, and strategies to effectively boost consumption demand with GAO Zhanjun, the Executive Editor-in-Chief of China Forex, who is also the Deputy Director of the National Institution for Finance & Development (NIFD), and a former Visiting Scholar at Harvard University.
Discussion 1:
China's Path Forward: Embracing a New Era of Comprehensive Economic Reforms and Adjustments
GAO Zhanjun: In 2024, the Chinese economy has experienced fluctuations, starting with a strong performance in the first quarter but encountering downward pressure in the second and third quarters due to various factors. In response, the Political Bureau of the CPC Central Committee meeting on September 26 decisively introduced a package of incremental policies, followed by key work arrangements outlined at the Central Economic Work Conference held in December. Recently, major economic indicators have shown gradual improvement, with more positive trends emerging. However, the Chinese economy continues to face significant challenges and uncertainties. Given this complex situation, what is your assessment of the current state and future prospects of China's economy?
LIU Shijin: Over the past two years, the Chinese economy has faced challenges after COVID-19, but has generally maintained a positive trend of growth and recovery. However, persistent downward pressure on aggregate demand remains a significant concern. A critical economic indicator --the gross domestic product (GDP) deflator, which reflects overall price levels,has recorded negative growth for seven consecutive quarters since the second quarter of 2023. In response, the Political Bureau of the CPC Central Committee at its meeting on September 26, 2024, decisively introduced a package of incremental policies. These measures have significantly boosted confidence among microeconomic entities and contributed to a rebound in high-frequency economic indicators since October 2024.
Despite these improvements, the economic recovery remains fragile, with structural imbalances posing a major challenge. A closer examination of the data reveals deeper issues. While China's GDP accounts for approximately 18% of the global total, and its manufacturing sector represents 30%, the proportion of consumption in GDP lags significantly behind international norms by about 15 to 20 percentage points. Moreover, household consumption, final consumption, and service consumption in China are roughly 25% to 33% lower than those of the Organization for Economic Co-operation and Development (OECD) countries at a similar development stage. This highlights a substantial gap in consumption levels or a structural deviation from global standards. As a result, marginal or incremental policy adjustments have limited impact. What China needs is a comprehensive transformation and reform to address these deep-rooted issues.
GAO Zhanjun: What are the underlying factors driving this structural imbalance in China's consumption patterns?
LIU Shijin: Several factors contribute to this structural imbalance. Firstly, China has long maintained a system and policy framework that prioritizes investment over consumption. Secondly, the equalization of basic public services remains underdeveloped. In recent years, urban residents have been facing pressure from education, healthcare, and housing, but the most substantial gap exists among rural residents, particularly the nearly 300 million migrant workers, of whom nearly 200 million have relocated to cities. Thirdly, China's urbanization rate and quality lag behind international standards. In OECD countries at a similar development stage, the urbanization rate typically exceeds 70% or even 80%. In contrast, China's urbanization rate for the permanent population is only 66%, while the registered population urbanization rate is even lower, at 48.3%. Given that a portion of consumption, especially service consumption, is closely related to the level of urbanization. Fourthly, from a macro perspective, China's income disparity remains relatively large, and the middle-income population is relatively small. This has created structural gaps in consumption growth, resulting in weak overall consumption demand at the macro level.
Reflecting on China's development trajectory, the proportion of consumption has remained low for many years. The economy has historically operated under an imbalanced, production-driven model, yet it has managed to function relatively well. In the past, China maintained a relatively high investment ratio and an exceptionally high savings rate on a global scale. Investment was seen as a major strength of China's economy, driving long-term economic growth. This investment-driven approach expanded the proportion of manufacturing, with excess capacity primarily absorbed through exports, infrastructure, and real estate.
While this imbalanced production model has had room for development, it is inherently constrained by real demand. Once real demand reaches certain limits, inevitable restrictions emerge. For example, China's real estate market is now in decline, and infrastructure investment is shrinking, leading to increasingly inefficient and ineffective investments. This signals that the imbalanced development model—characterized by excessive investment and insufficient consumption—is becoming unsustainable. Without significant adjustments, the overall economic growth rate will inevitably decline. China urgently needs a significant transformation in its economic and social development model. It must transition from an export- and investment-driven economy to one fueled by innovation and consumption, particularly service consumption. It should be noted that this significant transformation is not merely a matter of consumption and cannot be solved through marginal adjustments. Instead, it requires a comprehensive overhaul and reform of the economic development framework to address deep-rooted structural issues.
Discussion 2:
Distinguishing Between Symptoms of Insufficient Aggregate Demand and Their Root Causes
GAO Zhanjun: Currently, China's economy is grappling with numerous difficulties and challenges. The Central Economic Work Conference held in December 2024 explicitly pointed out that the most pressing issue is insufficient domestic demand. You have consistently emphasized the importance of distinguishing between the symptoms caused by insufficient aggregate demand and its root causes, particularly identifying the factors that contribute to this shortfall. Without such clarity, even well-intentioned stimulus policies may prove ineffective, potentially exacerbating existing problems or, more critically, resulting in missed opportunities. Could you elaborate further on this perspective?
LIU Shijin: Since the reform and opening up, the Chinese economy has sustained an impressive growth rate of around 10% for over three decades. This rapid expansion mirrors the trajectories of other successful East Asian economies, such as Japan, the Republic of Korea (ROK), and China's Taiwan, which have undergone similar growth patterns. This type of growth absorbs the technological achievements of the industrialization stage, condensing the growth that took developed economies decades or even centuries into just twenty to thirty years, often referred to as "compressed growth". However, such growth has an end.
Since the first quarter of 2010, the Chinese economy has gradually transitioned from high-speed to medium-speed growth following its peak, marking a significant shift in its growth trajectory. A notable parallel can be drawn with Japan's economic experience. During the 1950s and 1960s, Japan achieved rapid growth at approximately 9%, which moderated to around 4% in the early 1970s. By the early 1990s, growth had further declined to about 2%, with periods of stagnation or contraction. In comparison, China is now in the later phase of medium-speed growth and is likely to maintain this pace for another 5 to 10 years, with growth rates ranging between 4% and 5%.
Central to understanding this transition are two key concepts: the historical demand peak and demand structure. The historical demand peak represents the period during industrialization and urbanization when demand growth reaches its highest level. Once this peak is surpassed, economic growth begins to decelerate. The demand structure, on the other hand, refers to the underlying income distribution. Put simply, it particularly concerns the proportion of middle- and high-income groups and low-income groups. Two distinct patterns emerge: one characterized by a smaller middle- and high-income population and a larger low-income group; the other, often termed the "olive-shaped" structure, featuring a larger middle-income group and a smaller low-income segment.
The historical demand peak determines the transition from high-speed to medium-speed growth, while the demand structure influences the duration of the medium-speed growth phase. Prior to reaching the turning point, economic growth is mainly constrained by insufficient supply, often leading to inflationary pressures. This phase marks the supply capacity formation stage. After the turning point, the primary constraint shifts to insufficient demand, which directly contributes to slower economic growth. This shift is typically accompanied by a change from inflationary to deflationary pressures, or from rising to stagnant price levels.
According to international experience, economies that sustain medium-speed growth over extended periods typically exhibit low Gini coefficients (below 0.4), indicating a narrower income gap and a relatively large middle-income group. Such a demographic structure fosters sustained and substantial demand, which underpins medium-speed economic growth. Conversely, in economies with a wide income gap and a small middle-income group, once the potential demand from this group is exhausted, economic growth tends to slow significantly, potentially leading to low-speed growth or stagnation.
This phase represents a critical transition for economies moving from the middle-income to the high-income stage. Since World War II, numerous economies have industrialized and progressed from low-income to middle-income stage, but only a few, notably Japan and South Korea among large economies, have successfully advanced to the high-income stage. The income threshold of around US$10,000 is a particularly unstable point, where many economies experience fluctuations or regressions, leading to what is commonly referred to as "middle-income trap".
As previously noted, China faces a significant income disparity and a relatively small middle-income population. Data shows that China's middle-income group accounts for about one-third of the total population, approximately 400 million people, while the low-income group exceeds 900 million people, accounting for two-thirds of the population. Furthermore, the Gini coefficient has remained above 0.4 for many years, with some research suggesting it could be as high as 0.45 or more. This income imbalance is a key factor contributing to the current demand insufficiency.
GAO Zhanjun: You mentioned that the historical demand peak and demand structure are critical concepts.Could you elaborate on their profound policy implications?
LIU Shijin: Absolutely. There is no doubt that insufficient aggregate demand has become a fundamental reality in the macro economy. In such a scenario, adopting stimulus policies is a common response. However, only by deeply understanding the root cause of insufficient demand can China truly identify proper policy focus. For example, while there has been extensive discussion about macroeconomic stimulus policies, the choice of focus is crucial. Currently, there are several prevailing viewpoints on this issue.
One approach is to increase investment. Proponents argue that China's past high growth was largely driven by high investment, and there are still areas where investment can be expanded. They believe that boosting investment could maintain or even raise macroeconomic growth rates. However, the reality is that, given the current per capita income level, the proportion of investment is already excessively high, and the scope of effective investment that can generate meaningful economic and social returns is quite limited.
A more mainstream viewpoint, which I support, is to expand consumption. However, there are significant differences in the ideas and methods for achieving this. Drawing an analogy from pollution control, there are three approaches: end-of-pipe treatment, midstream treatment, and source treatment.
Let's start with end-of-pipe treatment. A prominent case is the distribution of consumption vouchers, similar to "helicopter money", where vouchers or cash are distributed indiscriminately to the public during periods of low consumption. While this approach can yield short-term effects, such as a sharp spike in consumption data in the month the vouchers are distributed— but the sustainability of this growth is questionable. What happens in the following months? Moreover, ensuring that these vouchers accurately reach low-income groups is a challenge. Even if they do, and are used to purchase goods, these individuals still face more critical issues such as housing, education, healthcare, and social security. These deep-rooted issues cannot be effectively addressed by simply distributing consumption vouchers.
Next, consider midstream treatment. For example, when addressing debt burdens, since much of the debt originates from bank loans, if stimulus funds are used to repay debt, a significant portion of these funds will flow back into the banking system. Banks may then encounter difficulties in re-lending these funds. While some funds can be used to settle unpaid corporate expenses, part of which may go toward employee wages, thereby driving consumption to some extent, this effect is uncertain. Additionally, institutions that reduced their debt burdens may revert to traditional growth strategies, such as expanding investment and launching large-scale projects. This could lead to continued investment expansion while consumption remains stagnant, further exacerbating the supply-demand imbalance.
So, which approach is more effective? I believe China should adopt source treatment. This means directing funds toward populations and areas that can most effectively expand consumption, particularly those that can significantly boost demand for service consumption. This is not merely about providing a one-off relief. More importantly, it is about "spending money to build new systems", thereby establishing a long-term and sustainable framework to address the structural deviation in consumption. This is the fundamental way to resolve the issue.
Discussion 3:
Identifying Pain Points: A Strategic Approach to Expanding Consumption
GAO Zhanjun: What strategies would you recommend for effectively stimulating consumer demand?
LIU Shijin: To effectively boost consumption demand in China, it is essential to distinguish between survival-oriented consumption and development-oriented consumption. Survival-oriented consumption, primarily driven by low-income groups, focuses on basic necessities such as food and clothing. This segment has largely stabilized, indicating that the Chinese population has largely met its basic needs. In contrast, development-oriented consumption is characterized by structural upgrading and includes areas such as education, healthcare, affordable housing, social security, culture, sports, entertainment, financial services, and transportation. Growth in consumption is now primarily fueled by this development-oriented segment.
The mechanisms for realizing consumption also differ significantly. Survival-oriented consumption is primarily individual-based, while development-oriented consumption often relies on collective consumption or public services. For instance, health insurance and social security operate on a mutual assistance basis, and school education follows a collective learning model. These closely relate to the level of equalization in basic public services provided by the government. Development-oriented consumption cannot expand effectively through individual efforts alone, and government involvement is essential. The government must build platforms, establish systems, and provide financial support to effectively integrate public spending with household consumption.
However, the lag in equalization of basic public services has directly constrained the growth of development-oriented consumption. Currently, urban residents are most concerned or worried about the pressure from education, healthcare, and housing. For nearly 300 million migrant workers and nearly 200 million migrant workers moving to cities, the shortfall in basic public services is even more pronounced. In addition, a significant portion of the income gap between China's 400 million middle- and high-income earners and its 900 million low-income earners stems from unequal access to public services.
To address these challenges and expand consumption, it is crucial to identify and tackle the key pain points. These include: firstly, development-oriented consumption supported by basic public services; secondly, targeted support for migrant worker groups and low- and middle-income groups; and thirdly, people-centered urbanization and rural-urban integration to promote equal rights.
A critical factor in addressing these pain points is the level of urbanization. The agglomeration effect of cities can reduce the cost of providing public services. In traditional rural areas, the high cost of modern infrastructure and basic public services makes their provision difficult. Compared to other developed economies with the same per capita income level, China has a relatively low urbanization rate.
Historically, China focused on the economic scale and agglomeration effects in production but neglected these factors in consumption, particularly in service consumption. This oversight must be addressed to unlock the full potential of consumption-driven growth. Without sufficient urban density, it is difficult to achieve high-level basic public services in areas such as education, healthcare, affordable housing, social security, elderly care, culture, and entertainment.
From an institutional level, several barriers hinder human-centered urbanization, primarily manifested in three forms of urban-rural inequality: firstly, inequality in identity and rights related to residency and migration, as represented by the household registration system; secondly, inequality in access to basic public services; thirdly, inequality in property rights, particularly in real estate
Discussion 4:
Unlocking Structural Potential via Demand-Side Reforms