Huang Kainan: Realizing the Effective Combination of Boosting Consumption and Improving Investment Efficiency
The Central Economic Work Conference [1] of 2024 deployed the first of its priority tasks for 2025: to "vigorously boost consumption, improve investment efficiency, and expand domestic demand in an all-round way." Currently, the primary difficulty facing China’s economic operation is insufficient domestic demand. Promoting the effective combination of boosting consumption and improving investment efficiency can both resolve the current problem of insufficient internal demand and help form a virtuous cycle where consumption and investment promote each other, thereby driving a high-level dynamic balance between supply and demand.
Accurately Understanding the Contribution Rates of Consumption and Investment to GDP
There are several methods for calculating Gross Domestic Product (GDP), including the production approach, the income approach, and the expenditure approach. Theoretically, the results calculated by different methods should be the same, but due to differences in calculation principles and data collection, some deviations exist. The familiar method of referring to consumption, investment, and net exports as the "Troika" [2] pulling economic growth utilizes the expenditure approach. The fundamental basis of the expenditure approach is that, for the economy as a whole, income must equal expenditure. This method divides a national economy into four sectors from the perspective of demand for products and services: the household sector, the corporate sector, the government sector, and the international sector. Summing the expenditures of these four sectors yields the GDP for that year. That is: within a certain period, a country's GDP equals the sum of final consumption expenditure, gross capital formation, and net exports of goods and services. Final consumption expenditure and gross capital formation are usually referred to as domestic demand, while net exports are referred to as external demand.
Using the expenditure approach to evaluate the contribution rates of the "Troika" to economic growth will, to a certain extent, overestimate the contribution of final consumption expenditure and gross capital formation to GDP while underestimating the contribution of exports. The reason is that imported consumer and investment goods are deducted when calculating net exports rather than being deducted from net consumption and net investment. Final consumption expenditure and gross capital formation do not consist entirely of domestically produced goods and services; they also come from imports. This portion of imported consumer and investment goods cannot be counted as a contribution to the country's GDP. However, the expenditure approach does not deduct them when calculating final consumption expenditure, leading to an overestimation of the contribution of consumption and investment (i.e., domestic demand) to GDP, meaning actual domestic demand is less than the statistical caliber suggests. When calculating external demand (net exports), the expenditure approach subtracts total imports from total exports; thus, imported consumer and investment goods are deducted there. It should be noted that China's current foreign trade is no longer the processing trade of "both ends outside" [3]; the proportion of general trade has exceeded 64%, and the value-added of exported products is increasingly created domestically. Therefore, regarding net exports as external demand underestimates the contribution of exports to GDP. At this moment, when the external demand environment is difficult, we should, on the one hand, continue to improve the quantity and quality of exports to strengthen their supporting role; on the other hand, we must exert greater effort to boost domestic demand, coordinating the basic role of consumption with the critical role of investment.
Boosting Consumption Must Be Supported by Improving Investment Efficiency
Boosting consumption requires increasing the consumption expenditures of both the government and residents. Government consumption expenditure comes from fiscal revenue and government bonds; residential consumption expenditure comes from residential income and bank loans. When consumption is in a relatively low equilibrium state, boosting it requires either activating previously unmet potential through innovative consumer products and scenarios or breaking the existing equilibrium by increasing the expenditures of consuming subjects. Increasing consumption expenditure includes increasing income and increasing debt. The government expands expenditure primarily through increasing fiscal revenue, expanding the fiscal deficit, and issuing government bonds; residents do so primarily through increasing personal income and bank loans. Trade-ins of consumer goods and various consumption subsidies are essentially government transfer payments; by reducing consumption costs to increase residential expenditure, they partway shift government public consumption toward residential consumption. In an equilibrium state, boosting consumption first requires solving the problem of where the money for increased expenditure comes from. It must be emphasized that whether increasing income or increasing debt, it must be supported by improving investment returns. From this perspective, consumption is past investment, and investment is future consumption.
Currently, China's government consumption accounts for about 30% of final consumption; public consumption is an important component of final consumption. Boosting consumption through increased government public consumption can be achieved by moderately increasing the fiscal deficit rate and issuing special government bonds. This tightly integrates boosting consumption with "filling the gaps" in people's livelihoods—improving expenditure levels for education, healthcare, elderly care, and childcare. This, in turn, exerts the multiplier effect of public consumption, driving the development of related livelihood service industries, moderately increasing social security levels, and reducing precautionary savings.
Improving residential consumption is the main stage for boosting consumption. Income is the key factor affecting residential consumption; boosting it requires first improving residential income and income expectations. In 2024, the actual growth rates of China’s per capita consumption expenditure and per capita disposable income were both 5.1%, with per capita consumption expenditure accounting for 68.3% of per capita disposable income. Considering the differences in marginal propensity to consume among different income groups, promoting income growth and burden reduction for low- and middle-income groups is particularly critical for boosting consumption. In 2024, the proportions of per capita wage income, net operating income, net transfer income, and net property income to per capita disposable income were 56.5%, 16.7%, 18.5%, and 8.3%, respectively. Increasing wage income requires improving investment efficiency to increase the "cooperative surplus" of labor and capital, while properly distributing this surplus to increase the proportion of labor remuneration in primary distribution [4] and the proportion of residential income in national income distribution, thereby stabilizing income growth expectations. Increasing net operating income requires improving returns on residents' productive investments. Increasing net transfer income requires increasing fiscal subsidies for durable consumer goods and increasing transfer payments for residential consumption. With the wide application of digital and AI technologies, big data analysis can be used for precise consumer profiling to provide personalized consumer finance services for people at different life stages, grasping trends in consumption habits and taking effective measures to transform consumption potential into actual consumption momentum.
Improving Investment Efficiency Must Be Guided by Boosting Consumption
Improving investment efficiency requires increasing the economic returns on fixed-asset investment and avoiding blind, repetitive, and inefficient investment. This is a key focus for expanding domestic demand and an important measure for rectifying "involutional" competition [5]. Improving investment efficiency should be guided by boosting consumption; the productive forces formed by new fixed-asset investment must be compatible with the consumption level and the upgrading of consumption structures under the "unified national market" [6].
Fixed-asset investment includes government investment and social investment. First, government investment should increase support for the renewal of traditional infrastructure and the construction of new infrastructure. By improving consumption conditions and innovating consumption scenarios, the consumption environment can be optimized to make consumption more convenient and experiential. This includes "filling the gaps" in rural consumption infrastructure and public service facilities, enhancing intercity transportation, logistics, and municipal infrastructure, and strengthening the construction of new infrastructure such as AI, the industrial internet, and the Internet of Things (IoT). Second, to further improve investment efficiency, fixed-asset investment should focus on upgrading traditional consumption and expanding improved consumption categories such as cultural tourism, sports events, education and training, and smart homes. It should support technical transformation and equipment renewal for new types of consumption like digital, green, and health consumption. This includes urban renewal, the renovation of "villages-in-the-city" [7] and dilapidated housing, the renovation of old urban residential communities, technical transformation and equipment renewal in key industries, equipment renewal in building and municipal infrastructure, renewal of transport equipment and old agricultural machinery, renewal of education, culture, and medical equipment, as well as digital transformations like the industrial internet and life-service digitalization, and green transformations like carbon reduction and pollution control. Third, improving investment efficiency requires promoting the reform of investment and financing systems. We should further improve the efficiency evaluation mechanism for government investment; speed up the establishment of evaluation systems for state-owned enterprises (SOEs) fulfilling their strategic missions; refine the classified evaluation system for SOE investment efficiency; and improve the fiscal-financial linkage mechanism to leverage the signaling role of government investment to effectively drive social investment.
The role of increasing investment is not just to expand domestic demand; it is also extremely important for the upgrading of the supply structure. Improving investment returns can expand effective investment and enhance total factor productivity (TFP) through technical transformation, equipment renewal, and infrastructure improvement, thereby updating old drivers of growth and cultivating new ones. Investment takes the satisfaction of consumption as its ultimate goal and impetus; it is not only guided by the boosting of consumption but is also an important support for it. To promote the effective combination of the two, we must, on the one hand, give full play to the decisive role of the market in resource allocation to achieve optimal allocation and maximum efficiency. On the other hand, we need to leverage the role of a "proactive government," using fiscal and monetary policies to expand domestic demand in an all-round way. Ultimately, the government and the market should form a synergy, bringing together the coordinated effects of fiscal, monetary, industrial, and market competition policies to optimize the supply structure while expanding domestic demand, achieving a high-level dynamic balance between supply and demand.
(Author: Huang Kainan, Researcher at the Shandong Provincial Research Center for Xi Jinping Thought on Socialism with Chinese Characteristics in the New Era; Vice President of the Party School [Academy of Governance] of the Shandong Provincial CPC Committee)