This year marks the beginning of the 15th Five-Year Plan period, making a strong start a key focus for delegates at the ongoing political meetings. During this period, China's development environment is undergoing profound and complex changes. The effective insufficiency of demand has been identified as a significant risk and challenge. A key economic conference further highlighted the prominent contradiction of strong domestic supply coupled with weak demand. Achieving a successful start to the plan necessitates a clear understanding of the main economic challenges and strategies to overcome the problem of insufficient effective demand.
Supply and demand are two fundamental, interdependent aspects of a market economy. Without demand, supply cannot be realized, and new demand can spur new supply. Conversely, without supply, demand cannot be met, and new supply can create new demand. The current prominent contradiction is the imbalance where supply is strong while demand is weak. For some time, China has vigorously implemented a strategy to expand domestic demand, continuously unleashing consumption and investment potential. While domestic demand's role as the main engine of growth has been reinforced, the issue of insufficient effective demand has not been fundamentally resolved. The constraint of strong supply against weak demand on smooth economic circulation remains pronounced.
In the consumption sector, the main issues are insufficient consumer capacity and willingness among residents, alongside persistently high precautionary savings. In recent years, the contribution of final consumption expenditure to economic growth has fluctuated significantly, often remaining below 60%. In 2025, consumption's contribution to growth reached 52%, further solidifying its foundational role in development. However, this still lags noticeably behind the stable 70-80% or higher levels seen in developed economies, particularly in the share of service consumption. In the investment sector, the problem manifests as a structural slowdown, with a notable lack of confidence in private investment. In 2025, national fixed-asset investment (excluding rural households) totaled 48.5186 trillion yuan, a decrease of 3.8% from the previous year. Within this, real estate development investment fell by 17.2%, investment in the tertiary sector dropped by 7.4%, and private investment declined by 6.4%. Overall, growth in effective investment remains weak, with many private enterprises facing practical difficulties, being reluctant, unwilling, or unable to invest. Price signals also indicate persistent weak demand; as of January 2026, the Consumer Price Index (CPI) had recorded a year-on-year increase of less than 1% for 35 consecutive months, while the Producer Price Index (PPI) remained in contractionary territory for 40 straight months.
What are the primary reasons for insufficient effective demand? First, cyclical factors: following the end of a period of high-speed growth, rates of investment and consumption growth typically see a sustained decline. As China's economy fully transitions from high-speed growth to high-quality development, deep structural adjustments intersect with cyclical fluctuations in the internal and external environment. This has led to a contraction in large-scale foundational investment, subsequently affecting employment and income, and causing a continued slowdown in consumption growth. The real estate sector, after a period of rapid expansion, is now in a phase of deep adjustment, leading to slower growth in housing consumption and significantly impacting fixed-asset investment, underscoring the urgent need to establish a new model for real estate development.
Second, structural factors: weak domestic demand, declining prices, and weakening expectations are mutually reinforcing, creating a vicious cycle. The restructuring of global industrial chains, the substitution effect of technological advances on traditional jobs, and upgrading pressures in certain industries are affecting the stable growth of resident incomes and undermining confidence in both consumption and investment. The interplay between demand, prices, and expectations follows a pattern: insufficient domestic demand translates into insufficient aggregate demand, leading to a general decline in price levels. Lower prices, in turn, affect corporate operations and profits, impacting employment and household income, which further exacerbates the lack of demand.
Third, institutional factors: bottlenecks persist within the domestic circulation system, and income disparities between different groups remain significant. On one hand, restrictive measures still exist in some consumption and investment areas, preventing the full release of potential demand and dampening enthusiasm for private investment. On the other hand, the share of household income in national income distribution is relatively low, and the proportion of labor remuneration in primary distribution remains insufficient. The redistributive system's ability to adjust income disparities is limited, and the role of tertiary distribution in improving income and wealth distribution patterns has not been fully realized. Consequently, the consumption capacity of low- and middle-income groups is insufficient, while consumption among higher-income groups has entered a phase of stability or slow growth, collectively hindering the sustained expansion of domestic demand. In short, the current insufficiency of domestic demand is characterized by its stage-specific nature, resulting from a mix of short-term and long-term issues, total and structural problems, and the interplay of real factors and expectations, all against a backdrop of institutional influences.
Expanding domestic demand is crucial for both economic stability and security; it is not a temporary measure but a strategic imperative. Proposals for the 15th Five-Year Plan emphasize adhering to the strategic basis of expanding domestic demand, closely integrating efforts to improve livelihoods with stimulating consumption, and linking investment in physical assets with investment in human capital. The aim is to use new demand to guide new supply and use new supply to create new demand, fostering a positive interaction between consumption and investment, and between supply and demand, thereby enhancing the endogenous dynamism and reliability of the domestic circulation. Specifically, focus should be placed on three key areas:
Vigorously boosting consumption. The key lies in stabilizing employment, increasing incomes, and stabilizing expectations, thereby tangibly enhancing residents' consumption capacity and striving to synchronize growth in household income with economic growth, and increases in labor remuneration with improvements in labor productivity. Simultaneously, unreasonable or overly restrictive measures in consumption sectors should be removed, and new, broad-based, and highly visible consumption scenarios should be developed.
Expanding effective investment. It is essential to systematically address the bottlenecks, difficulties, and pain points that constrain private investment, enabling social capital to be willing, daring, and able to invest, thus fully unleashing the vitality of private investment. Government investment should better play its role in leveraging and amplifying effects, improving investment efficiency, and addressing the issue of prioritizing input over效益 (benefit/efficiency) in some sectors, ensuring that investment funds generate greater economic and social value.
Resolutely eliminating bottlenecks hindering the development of a unified national market. This involves unifying fundamental institutional rules of the market, removing barriers in factor access, qualification recognition, bidding, and government procurement, standardizing local governments' economic promotion activities, breaking down local protectionism and market segmentation, and comprehensively rectifying "involution-style" competition to foster a market order characterized by high quality commanding fair prices and healthy competition.
In the past, China effectively responded to the 1998 Asian Financial Crisis and the 2008 Global Financial Crisis by expanding domestic demand, accumulating valuable experience. From this new starting point, by strengthening confidence, leveraging past experience, and resolutely implementing the strategy to expand domestic demand while fully leveraging the foundational role of consumption and the key role of investment, China can certainly overcome the challenge of insufficient effective demand and achieve a successful start to the 15th Five-Year Plan period.
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