China's most critical economic mission is consumption: Central bank official

Beijing is deeply concerned about China's dependence on exports as Trump ramps up trade tensions.

In this article:

• China’s top economic policymakers are deeply focused on growing consumption this year.

• How consumption has declined as contributor to China’s GDP growth in recent years, while exports have picked up the slack.

• China’s consumption levels remain comparatively low compared to other major economies at similar stages of development.

• How China plans to grow consumption in 2025 and key policy recommendations.

The chief mission for China’s economic policymakers this year is to drive growth in consumption, says a former senior official from the Chinese central bank.

Sheng Songcheng (盛松成), formerly the head of the statistical department at the People’s Bank of China (PBOC), highlighted the array of policy signals sent by Beijing on the urgent need to boost consumption, during a speech he delivered on 26 March at the Global Wealth Management Forum (全球财富管理).

This year’s Government Work Report delivered at China’s Two Sessions congressional event in March called for “vigorously spurring consumption, raising the returns on investment, and comprehensively expanding domestic demand.”

This was a reiteration of the same points made in December last year, at China’s all important Central Economic Work Conference.

Sheng highlights the key significance of the repeat use of this phrasing, with the term “vigorously spurring consumption” arriving at the start of the queue.

“This policy formulation is important in terms of theoretical innovation and practical significance,” Sheng said.

“Its importance is embodied by putting the vigorous spurring of consumption ahead of investment, highlighting the priority that consumption now takes in macroeconomic policy.

“In theoretical terms, it clearly makes consumption the focal breakthrough point for the inadequacies in domestic demand, and signals an important shift in economic development concepts.”

While this does not mean overlooking the role of investment, Sheng argues that the new formulation presages “greater emphasis on the coordinated development of consumption and investment, and joint driving of expansion in domestic demand.”

Consumption has declined as a driver of Chinese growth

Sheng notes that in recent years, domestic demand - in the form of consumption and capital formation - has seen its contribution to economic growth steadily decrease.

As of the end of the H1 2023, end consumption expenditures made a 2.0 percentage point contribution to 6.5% year-on-year (YoY) GDP growth.

This fell to 1.1 percentage points of 5.0% GDP growth as of the end of Q3 2023, and continued to slide to 0.6 percentage points of 5.3% growth by the end of Q1 2024.

Since then, end consumption expenditures have made a contribution of less than 2 percentage points to YoY GDP growth measured at the end of each quarter.

At the same time that the positive impact of consumption has fallen, net exports have seen their contribution to GDP growth rise sharply, reversing their negative impact in the second half of 2023.

Net exports made a 30% contribution to the Chinese economy’s full year growth for 2024, and more than 45% for the third and fourth quarters of that year.

While exports are helping to keep the economy afloat, Chinese policymakers are highly concerned about the problems this dependence on external sources of demand could create, especially in light of geopolitical tensions and Trump’s fast mounting trade war.

This issue of economic security has of course been one of the chief motivators of China’s new-found fixation with growing domestic consumption.

“Given uncertainties in the international economic and trade environment - especially the impact of geopolitical factors, it could be very difficult to maintain such a high growth contribution from net exports,” Sheng said.

“This means a much greater need to expand domestic demand - and in particular invigorating consumption.

“It’s on this basis that the Government Work Report has called for the ‘more effective integration of spurring consumption and investment.’”

Is China in a position to grow consumption further?