China’s Lack of Domestic Consumption Is a Big Problem

“The first task of China’s economic work for 2026 is to adhere to domestic demand as the main driver and build a strong domestic market,” Beijing’s leadership announced at the Central Economic Work Conference held last month. But clear statements do not necessarily mean clear actions. As much as Beijing says it may want to increase consumption at home, for the sake of domestic stability and international sustainability, Chinese leaders may not be willing to act on the scale necessary to achieve this.

Even before the 2008 financial crisis, which prompted Beijing to acknowledge the volatility of global markets, Chinese officials emphasized the importance of consumption. As early as 2004, Beijing articulated a people-centered approach to development, and in 2007 the 17th Party congress explicitly called for rebalancing growth and expanding domestic demand.

But despite these early signals, in practice policy priorities continued to favor industrial capacity, infrastructure, and export competitiveness. Hence, doubts about today’s political resolve are understandable. Chinese President Xi Jinping now appears determined to remove any ambiguity. In a recent article in QuicheIn this main intellectual journal of the Chinese Communist Party, titled “Expanding Domestic Demand is a Strategic Option,” Xi raises weak domestic demand to a fundamental issue of economic stability and security, claiming that boosting domestic demand “is not a temporary means but a strategic option.”

The article is unusually direct in identifying inadequate domestic demand, especially weak consumption, as the most pressing challenge facing the economy and calls for accelerating efforts to close the consumption gap.

But some critics’ suspicions are not just about Xi’s intentions. It is rooted in the structure of the Chinese growth model itself. China’s economic system has long been organized around a production-first logic, with investment at the starting point of the growth chain and consumption at the end.

Investment was treated as the primary instrument, while consumption was framed as an end result rather than a basis for growth. To be fair, domestic demand has increased steadily over time, and household consumption has also risen in absolute terms. But the expansion on the supply side was much faster. The result was a continuing imbalance between productive capacity and household demand.

However, last month’s CEWC contained signs that this imbalance is no longer seen as a secondary issue. Once again, the leadership described the economy as facing “strong supply and weak demand,” but this time it coupled it with new formulas that defined domestic demand as a structural condition that must be rebuilt.

Most telling was the call for “investment in people”, combined with a clear shift towards “domestic demand-led” development and a renewed emphasis on fully tapping into internal market potential. For the first time, the CEWC highlighted a plan to increase incomes for urban and rural residents, expand consumption of services, expand insurance coverage for workers in the gig economy, and remove regulatory barriers that restrict household spending on health care, education, elder care, and home services.

This reflects a growing realization that weak demand is linked to income expectations, inadequate service sector provision, precautionary saving, and gaps in the social safety net. The parallel focus on boosting private investment and reducing “disruptive” competition underscores the emerging consensus that the slowdown in domestic demand is fundamentally a macro problem – one that requires restoring confidence and employment in the private sector, rather than relying primarily on internal trade or consumption subsidies. There was little room left for delay. The investment-intensive model that has led to sustained growth for decades delivers diminishing returns. Property is no longer a viable economic engine. Infrastructure expansion faces financial limits and declining marginal productivity. Demographic headwinds are intensifying. At the same time, trust between households and private businesses remains fragile, shaped by income uncertainty, property market contraction, and remaining scars from past regulatory abuses.

Although China’s trade performance over the past year has been stronger than many expected, this resilience has not succeeded in eliminating fundamental weaknesses. Trade tensions remain a structural feature of the external environment. Market access restrictions, technological controls, and industrial policy disputes continue to narrow China’s scope for external growth.

Beyond these constraints, China’s external environment is becoming less forgiving, with strong exports in sectors from electric cars to clean energy increasingly seen – rightly or wrongly – as evidence of excess structural capacity. These perceptions turn into political responses: tariffs, subsidy investigations, settlement requirements, and political resistance.

The result is that export performance alone no longer guarantees sustainable external demand, strengthening the argument that China’s growth model must rely more firmly on domestic absorption.

This leads us to a clear contradiction in the Consumer Protection Commission’s signals. Domestic demand has been raised rhetorically, but the leadership seems to believe the pivot can continue without direct transfers to households or stimulating widespread consumption. The issue may be less opposition than constraints: the judgment within Beijing is that such tools face inherent limitations and may be difficult to deploy effectively within China’s current governance framework.

Part of this caution reflects external circumstances. Strong exports through most of 2025 provided temporary breathing room, reducing the urgency for more aggressive demand-side intervention. This flexibility reinforces the political logic of expanding the current model rather than enacting fundamental transformations.

Administrative and institutional realities are also important. China’s financial and governance systems are not suited to broad-based cash transfers. Household income, consumption patterns and access to financial infrastructure vary significantly between regions. Not all households are fully integrated into the formal banking system, and income and employment data remain uneven in coverage and quality. Local governments, which are responsible for a large amount of social spending, are already under significant financial pressure.

There are also inherent political sensitivities in aggressively promoting household consumption. Sustained consumption growth ultimately means households receiving a larger share of national income, higher compensation for workers, and a rebalancing of power between the state, companies and workers. Engineering such a transformation tests the system’s ability to empower private businesses and households without raising institutional anxiety or political sensitivities. Empowering the household sector implies greater autonomy, which would weaken the influence and authority of the party-state. These dynamics help explain why the CEWC’s domestic demand strategy is shaped by “investment” rather than direct cash transfers to households. The emphasis on “investing in people” through expanding services, education, and health care infrastructure brings the consumption agenda closer to the supply side, in the context of enhancing productivity and supporting growth rather than redistribution. This approach fits more comfortably with existing policy models.

Despite all the limitations, the CEWC noted an evolution in how leadership is handling the request. The latest policy language suggests a clearer understanding of the underlying drivers of weak consumption and a more coherent framework for boosting both demand and investment over time. The focus on services is not misplaced. Consumption of services already accounts for nearly half of household spending, and demand for health care, elderly and child care, as well as education, is increasing rapidly as the population ages. However, it is precisely services where supply constraints and regulatory barriers are most binding.

Income growth and closing the insurance gap in the gig economy reflect recognition that weak consumption is rooted in labor market conditions. A one-time stimulus will do little to change household behavior if income expectations remain weak and overall sentiment deteriorates. Stable employment, improved access to education and employment opportunities, and stronger social systems are all aimed at reducing uncertainty and encouraging spending over time.

And this gradation is precisely the danger. Income-based confidence is slowly building, while traditional growth engines have already weakened. Prolonged weak demand threatens to reinforce deflationary dynamics, discourage private investment and employment, and entrench pessimistic expectations. If consumption remains weak while supply capacity continues to expand, the imbalance may worsen.

There is also significant risk in implementation. Many policies associated with “investing in people” depend on local governments facing strict financial constraints and competing priorities. Expanding education and health care capabilities, improving the quality of services, and stabilizing employment all require sustained funding and administrative commitment at the local level.

Historically, domestic incentives have prioritized production and investment, the most visible and politically visible drivers of growth – often through financing land and building infrastructure projects. Now that land revenues have weakened significantly and debt constraints have tightened significantly, local governments may be less willing and less able to finance the “investing in people” agenda promoted by Beijing.

It is worth noting that in Xi’s official speech at the CEWC, he explicitly warned that failed domestic implementation and distorted incentive systems are becoming more binding. He criticized local bureaucrats’ misguided views on performance measures, which led them to favor clear, short-term “achievements” over long-term foundational results.

Xi urged officials to move away from GDP-only targets, limit “image projects”, and adopt more differentiated and effective evaluation systems that reward real results rather than obsession with headline growth.

But aligning fiscal and employment incentives in favor of consumption and services will require deeper reforms, including rebalancing the financial system toward local governments and shifting the tax base away from production. These are difficult reforms.

The more difficult question is whether this axis will have political consequences. It is a mistake to assume that empowering the family inherently destabilizes the party-state. The real political danger lies not in families’ increased spending, but in their continued sense of insecurity. Economic fluctuations—unpredictable health care and education costs, precarious employment prospects, and a weak safety net—create the kind of anxiety that can undermine the political credibility of the party-state.

Therefore, the pivot towards domestic demand is not optional but inevitable. The worry is that the timeline Beijing has in mind may be too long. For now, Beijing appears content to remain neutral, gradually promoting domestic demand reforms while relying on remaining strengths in industry and trade to stabilize growth. This strategy may buy time and postpone difficult choices. But if demand remains weak while supply continues to expand, deflationary pressures, margin squeezes, and counter-revolutionary competition will intensify – undermining employment, wage growth, and the foundations of sustainable consumption. In the absence of a faster and more credible boost to domestic demand, this strategy risks becoming self-defeating: trying to stimulate consumption while the underlying sources of household insecurity remain unresolved. For now, the jury is still out. There is clearer recognition of the problem, but domestic demand still falls between ambition and constraints. The question is not whether China needs domestic demand, but whether its political economy can supply this demand in a timely manner.

Huiyan Li contributed research assistance.