“Task One of China’s 2026 economic work,” Beijing’s leadership declared at last month’s Central Economic Work Conference (CEWC), is to “adhere to domestic demand as the main driver and build a strong domestic market.” But clear statements don’t necessarily mean clear actions. As much as Beijing says it might want to grow consumption at home, for both domestic stability and international sustainability, Chinese leaders may not be willing to act on the scale necessary to make it reality.
Even before the 2008 financial crisis, which jolted Beijing into recognizing 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.
Yet, despite these early signals, policy priorities in practice continued to favor industrial capacity, infrastructure, and export competitiveness. Given that, skepticism about political resolve today is understandable. Chinese President Xi Jinping now appears intent on removing any ambiguity. In a recent article in Quishi, the Chinese Communist Party’s key intellectual journal, titled “Expanding Domestic Demand Is a Strategic Choice,” Xi elevates weak domestic demand to a core issue of economic stability and security, arguing that boosting domestic demand is “not a temporary expedient but a strategic choice.”
The piece is unusually direct in identifying insufficient 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’ doubts aren’t just about Xi’s intentions. They are rooted in the structure of China’s growth model itself. China’s economic system has long been organized around a production-first logic, in which investment sits at the starting point of the growth chain and consumption at its end point.
Investment has been treated as the primary instrument, while consumption has been framed as the eventual outcome rather than the foundation of growth. To be fair, domestic demand has steadily increased over time, and household consumption has risen in absolute terms. But the expansion of the supply side has been way faster. The result has been a persistent imbalance between production capacity and household demand.
Yet last month’s CEWC contained signs that this imbalance is no longer viewed as a secondary issue. The leadership again described the economy as facing “strong supply, weak demand,” but this time paired it with new formulations that defined domestic demand as a structural condition that must be rebuilt.
Most telling was the call to “invest in people,” alongside an explicit shift toward “domestic demand-led” development and a renewed emphasis on fully tapping the potential of the internal market. For the first time, the CEWC highlighted an income-raising plan for urban and rural residents, the expansion of service consumption, broader insurance coverage for gig-economy workers, and the removal of regulatory barriers constraining household spending in health care, education, elder care, and household services.
This reflects a growing recognition that weak demand is tied to income expectations, insufficient service sector provision, precautionary saving, and gaps in the social safety net. The parallel focus on boosting private investment and curbing “involution-style” competition further underscores an emerging consensus that sluggish domestic demand is fundamentally a macro problem—one that requires restoring confidence and private sector employment, rather than relying primarily on trade-ins or consumption subsidies. There’s little room left for delay. The investment-heavy model that sustained growth for decades is delivering diminishing returns. Property is no longer a viable economic engine. Infrastructure expansion faces both fiscal limits and declining marginal productivity. Demographic headwinds are intensifying. At the same time, confidence among households and private firms remains fragile, shaped by income uncertainty, the property market downturn, and lingering scars from past regulatory overreach.
While China’s trade performance over the past year has been stronger than many expected, that resilience has not eliminated underlying vulnerabilities. Trade tensions remain a structural feature of the external environment. Market access constraints, technology controls, and industrial policy disputes continue to narrow China’s external growth space.
Beyond these constraints, China’s external environment is becoming less forgiving, with export strength in sectors from electric vehicles to clean energy increasingly viewed—rightly or wrongly—as evidence of structural overcapacity. These perceptions are hardening into policy responses: tariffs, subsidy probes, localization requirements, and political pushback.
The result is that export performance alone no longer guarantees sustainable external demand, reinforcing the case that China’s growth model must rest more firmly on domestic absorption.
This brings us to an apparent contradiction in the CEWC’s signals. Domestic demand has been elevated rhetorically, yet the leadership appears to believe the pivot can proceed without direct household transfers or large-scale consumption stimulus. The issue might be less opposition than constraint: a judgment within Beijing that such tools face inherent limitations and may be difficult to deploy effectively within China’s existing governance framework.
Part of this caution reflects external conditions. Export strength through much of 2025 has provided temporary breathing room, reducing the urgency for more aggressive demand-side intervention. That resilience reinforces the political logic of extending the existing model rather than enacting substantial shifts.
Administrative and institutional realities also matter. China’s fiscal and governance systems are poorly suited to broad-based cash transfers. Household incomes, consumption patterns, and access to financial infrastructure vary widely across regions. Not all households are fully integrated into the formal banking system, and income and employment data remains uneven in coverage and quality. Local governments, responsible for much social spending, are already under significant fiscal strain.
There are also political sensitivities embedded in aggressively boosting household consumption. Sustained consumption growth ultimately implies a larger household share of national income, higher labor compensation, and a rebalancing of power among the state, firms, and workers. Engineering such a shift tests the system’s ability to empower private businesses and households without triggering institutional unease or political sensitivities. An empowered household sector implies greater autonomy, diluting the party-state’s leverage and authority. These dynamics help explain why the CEWC’s domestic demand strategy is framed through “investment” rather than direct cash transfers to households. Emphasizing “investment in people” through expanded services, education, and health care infrastructure keeps the consumption agenda closer to the supply side, framed as productivity-enhancing and growth-supportive rather than redistributive. This approach aligns more comfortably with existing policy paradigms.
For all its limitations, the CEWC pointed to an evolution in how the leadership approaches demand. Recent policy language suggests a clearer understanding of the underlying drivers of weak consumption and a more coherent framework for strengthening both demand and investment over time. The focus on services is not misplaced. Service consumption already accounts for nearly half of household spending, and demand for health, elder, and child care as well as education is rising rapidly as the population ages. Yet services are precisely where supply constraints and regulatory barriers are most binding.
Income growth and closing the gig economy’s insurance gap reflect recognition that consumption weakness is rooted in labor market conditions. One-off stimulus will do little to change household behavior if income expectations remain weak and macro sentiment deteriorates. Stable employment, improved access to education and job opportunities, and stronger social systems are all intended to reduce uncertainty and encourage spending over time.
That gradualism is precisely the risk. Income-led confidence builds slowly, while traditional growth engines have already weakened. Prolonged weak demand risks reinforcing deflationary dynamics, discouraging private investment and hiring, and entrenching pessimistic expectations. If consumption remains subdued while supply capacity continues to expand, the imbalance may worsen.
There is also a significant execution risk. Many of the policies associated with “investment in people” rely on local governments facing tight fiscal constraints and competing priorities. Expanding education and health care capacity, improving service quality, and stabilizing employment all require sustained funding and administrative commitment at the local level.
Historically, local incentives have prioritized production and investment, the most visible and politically legible drivers of growth—often through land finance and infrastructure project build-outs. Now that land revenue has significantly weakened and debt constraints have drastically tightened, local governments may be both less willing and less able to fund the very “investment in people” agenda that Beijing is promoting.
Notably, in the official narrative of Xi’s speech at the CEWC, he explicitly warned that local implementation failures and distorted incentive systems had become more binding. He criticized local bureaucrats’ misguided views of performance metrics, which have led them to privilege short-term, visible “achievements” over long-term, foundational outcomes.
Xi urged officials to move away from GDP-only targets, curb “image projects,” and adopt more differentiated and effective evaluation systems that reward real results rather than an obsession with headline growth.
But aligning fiscal and career incentives to favor consumption and services would require deeper reforms, including rebalancing the fiscal system toward local governments and shifting the tax base away from production. These are difficult reforms.
The hardest question is whether this pivot will have political consequences. It is a mistake to assume that household empowerment is inherently destabilizing to the party-state. The real political risk lies not in households spending more but in them feeling persistently insecure. Economic volatility—unpredictable health care and education costs, unstable employment prospects, and a weak safety net—creates precisely the kind of anxiety that can undermine the party-state’s political credibility.
A pivot toward domestic demand is therefore not optional but imperative. The concern is that the timeline Beijing has in mind may be too long. For now, Beijing appears content to remain on the fence—advancing domestic demand reforms incrementally while relying on residual strengths in industry and trade to stabilize growth. That strategy may buy time and defer hard choices. But if weak demand persists while supply continues to expand, deflationary pressures, margin compression, and involutionary competition will intensify—undermining employment and wage growth, the foundations of sustainable consumption. Without a faster and more credible strengthening of domestic demand, the strategy risks becoming self-defeating: attempting to stimulate consumption while the underlying sources of household insecurity remain unresolved. For now, the jury remains out. There is a clearer recognition of the problem, but domestic demand still sits uneasily between aspiration and constraint. The question is not whether China needs domestic demand but whether its political economy can deliver it in time.
Huiyan Li contributed research assistance.
