Global business: Will China's pivot to a consumption-based economy restore growth?

China is pivoting to consumption-driven growth. (Image generated by WixAI)

By SIYUAN WEN

Global Business Journalism reporter

The past decade has shown the limits of China’s investment-driven growth model. To continue its economic rise, the world’s second largest economy needs to rely more on the purchasing power of its massive middle class, economic analysts contend.

“China doesn’t need to build as fast and excessively as in the past," Chinese economics journalist Wu Chen told Global Business Journalism students. "China needs to move from an investment-led economy to a consumption-driven economy.”

The rationale for this transformation lies in the changing dynamics of China’s development. For years, investment has been a dominant driver of growth in the country's economy, building world-class infrastructure and a robust manufacturing base. However, this model has gradually revealed limitations. Excessive investment has led to overcapacity in some sectors and rising local government debt, while the country's heavily on external demand for its products has increased its vulnerability to global economic fluctuations.

In contrast, China’s population of 1.4 billion, including 400 million middle-income people, form a super-sized domestic market with enormous consumption potential. According to a report in People’s Daily, consumption has become the primary engine of economic growth, contributing 44.5% to GDP growth in 2024 and acting as a “stabilizer” amid economic fluctuations. S&P Global in early January predicted a 2.7% growth in domestic consumption for goods (excluding petroleum) and a 5.5% increase for services in 2026.

This shift aligns with the government's concept of high-quality development, shifting growth momentum from factor input to efficiency improvement and innovation. The transition has been boosted by solid policy support from the central government. The 2025 Government Work Report prioritizes “boosting consumption” as a key task, while the “Special Action Plan for Promoting Consumption” lists targeted measures to be implemented. Fiscal policies such as consumption vouchers and tax incentives aim to directly stimulate spending, while monetary tools like reserve requirement ratio cuts have eased financing conditions for consumer-related sectors. These measures form a policy framework to address both short-term consumption recovery and long-term structural optimization.

Emerging consumption trends show signs that the actions are injecting new vitality into the economy. Digital consumption formats such as live-streaming e-commerce and community group buying have flourished, with online retail sales of physical goods increasing. Meanwhile, consumption upgrading is evident in the rising demand for quality services — from cultural tourism to smart healthcare, and from “emotional value” experiences like Harbin’s ice-snow season to cost-effective options represented by Zibo’s barbecue.

Domestic brands are gaining popularity, and new consumption areas such as the silver economy (for aging population) are expanding, enriching the consumption ecosystem. These trends reflect a shift from material consumption to experience-driven consumption, creating sustainable growth drivers.

Despite remarkable progress, structural challenges remain. Insufficient supply of public services in education, medical care, and elderly care has strengthened residents’ precautionary savings motives. According to a report from the Bank of China, the service consumption ratio, at around 26% of GDP, still lags behind international levels, indicating untapped potential.

Additionally, income inequality and volatile capital markets affect consumption confidence. Addressing these issues requires multi-pronged efforts: increasing disposable income through employment support and tax reforms, improving the social security system to reduce consumption worries, and enhancing high-quality service supply to meet upgraded demands.

The journey ahead requires patience and systematic efforts. China’s shift from investment-led to consumption-driven growth is a profound transformation that balances stability and progress. This transition leverages the advantages of a super-sized market, responds to people’s aspirations for a better life, and builds resilience against external uncertainties.

As policies continue to refine and consumption potential is further unleashed, this shift will not only sustain economic growth but also redefine China’s development model — prioritizing quality, equity and sustainability over mere speed. For China, the path to prosperity in coming years is clear.

“Household consumption will be key to sustaining growth amid external and domestic economic challenges,” said Mara Warwick, World Bank Division Director for China, Mongolia and Korea, in a 2025 World Bank analysis.