By Kevin Yao
BEIJING (Reuters) -China’s over-reliance on investment and exports to power its $19 trillion economy appears to have reached a limit.
Chinese leaders are signalling a sharper shift towards supporting consumption over the next five years as limited investment room and slowing exports have exposed vulnerabilities, though measures may take time to yield results.
While the goal to expand domestic demand has been a longstanding one, and will not trump high-tech manufacturing as a priority, analysts say the proposals in the 2026-2030 plan are more explicit.
“The suggestion explicitly pledged to raise the consumption share in GDP. The philosophy of consumption policy also seems to have shifted from almost supply-centric to supply-and-demand balanced,” Citi analysts said in a note.
Structural imbalances have certainly deepened amid China’s property market crisis and a trade war with Washington.
This week, the Communist Party leadership pledged to “reasonably raise the proportion of public service expenditure in fiscal spending to enhance residents’ consumption capacity.”
They pledged to step up consumer-focused policies, improve income distribution to boost household income, and increase the central government’s share of social spending to better support households.
“China’s next five-year plan will give more prominence to households and consumption than ever before,” Andrew Batson, China research director at Gavekal Dragonomics, said.
The five-year plan recommendations reaffirmed last week’s official remarks that China will increase the proportion of government investment for people’s livelihoods and raise the percentage of household consumption of GDP “significantly” over the next five years.
“The allocation of resources will shift more towards consumption, as large-scale expansion of traditional industries and infrastructure has reached its limit,” said a policy adviser who spoke on condition of anonymity. “Future investment will focus on high-tech industries and new infrastructure.”
China may aim to increase the household consumption rate by about 5 percentage points over the next five years, but policy advisers say it is unclear whether the government will set a specific target in the upcoming five-year plan.
Attempts to boost consumption and related reforms over the past decade have been slow to take root in the real economy. Consumer confidence has remained low because of inadequate social welfare, slowing income growth and a property crisis that has eroded household wealth. The services sector has also taken time to develop.
Currently, household consumption accounts for about 40% of GDP, far below nearly 70% in the United States. Some government advisers suggest China should aim for a consumption rate of 50% within the next decade.
“The key to boosting domestic consumption is resource distribution,” ANZ analysts said in a note.
Analysts and investors are watching for measures that redirect funds and resources from businesses and government investment to households, which will be crucial for unlocking consumer demand.
Alongside the consumption focus, the leadership reaffirmed its commitment to maintaining a reasonable manufacturing share in the economy, prioritising emerging industries such as new energy, aerospace and advanced materials. Manufacturing accounts for around a quarter of GDP.
China unveiled its outline for policy goals for 2026-2030 last week, prioritising manufacturing and technology reliance while also pledging to boost consumption.
The full five-year plan, with detailed economic targets, will be released at the annual parliament meeting in March.
“INSUFFICIENT DEMAND”
Capital Economics analyst Julian Evans-Pritchard said that fiscal policy will be key to boosting consumption, and the share of fiscal spending on investment – now at a three-decade high – could decline in the coming years.
The government spends over 6% of GDP annually on investment, excluding significant funding from quasi-fiscal agencies like local government financing vehicles and policy banks, he said.
“But the wider policy agenda will limit how quickly this happens, and it will take a long time for the imbalances in China’s economy to be fully addressed,” he said.
Of the 1.3 trillion yuan ($182.5 billion) in ultra-long special treasury bonds planned for this year, 300 billion yuan will be allocated to support a consumer goods trade-in scheme, with the rest for equipment upgrades and investment projects.
President Xi Jinping, in remarks published on Tuesday, underscored the focus on boosting consumption, citing “increasing downward pressure on the economy and insufficient effective demand.”
China’s economic growth slowed to its weakest pace in a year in the third quarter as soft domestic demand left it reliant on exports amid U.S. tariffs. Economists are increasingly calling for social welfare and other reforms to address supply-demand imbalances and persistent deflation.
“Whenever we face international economic instability, we always rely on the domestic economy to respond to ‘black swan’ events,” Yang Ping, head of the investment institute of the National Development and Reform Commission, the state planner, told reporters on Monday.
“We will promote a significant increase in the consumption rate through income distribution reform and other measures.”
($1 = 7.1230 Chinese yuan)
(Reporting by Kevin Yao; Additional reporting by Ellen Zhang; Editing by Jacqueline Wong)
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