How to Grasp the Focus of Expanding Domestic Demand

The Central Economic Work Conference recently stated that adhering to the strategic focus of expanding domestic demand and forming a strong domestic market are two important bolsters in building a new development pattern. We must see the importance and urgency of expanding domestic need in this historical moment.

The idea of promoting economic development by expanding aggregate demand and taking consumer demand as the basic foothold has been clearly stated in the 11th Five-Year Plan. At present, we need to take smooth circulation of the national economy as our starting point, increase domestic consumer demands so as to make production, distribution, circulation, and consumption rely more the home market, and the supply system better match domestic demands, so as to create a higher level of dynamic balance where demand pulls supply, and supply creates demands. Therefore, it is necessary to better understand the policy implications of straightening out circulation of the national economy, as well as the significance of promoting the "dual circulation" in which domestic circulation plays a leading role.

Since the coronavirus outbreak, all economies have been impacted. For China, the international circulation was greatly disrupted because of the decline of external demand and China-US trade friction. Thus, we need stronger domestic investment and consumption. It is not entirely accurate to define China’s development as export-oriented. Data shows that more than one-third of the goods produced were exported to the international market in 2006. After that, the proportion kept falling, to less than one-fifth in 2019. In other words, in 2019, 80% of the national economy was domestic circulation.

A larger economy means a larger market, and stronger domestic spending power , and the GDP's stronger dependence on the domestic circulation. With China’s GDP continues to grow in terms of its proportion in the world economy, the proportion of exports in GDP decreases accordingly. Moreover, along with improving income levels, China’s industrial structure has undergone major changes. The service sector will continue to take an increasing percentage of China’s GDP. The fact that most items service sectors are non-tradable would also lower the share of exports in GDP.

As I see it, on the one hand, the traditional way of China's participation in international circulation will face more challenges and pressure. On the other hand, the turn in developmental phases brings China immense and unique internal edge and potential, which will be favorable conditions for China to meet those challenges. At present, we should proceed from the new stage of development, build a new development pattern, seize the opportunity, and promote a series of initiatives to expand domestic demand.

To release the potentials in domestic demand, we need to resort to effective institutional arrangements for guiding consumption, savings, and investment.

I.Optimize the structure and quality of supply, and to promote the adaptability of our supply system to domestic demand. We can start by enhancing the link between our innovation and industrial chains, strengthening core technology research projects, and tackling bottleneck problems. We should also put more efforts in advantageous areas to produce unparalleled technologies, and lay a solid industrial foundation in basic manufacturing, technology, and material to create new growth points.

II.Release the potentials of consumption through reforms. We should optimize income distribution and adjust income levels between different areas and groups so as to further improve the effectiveness of public spending in education, medical care, old-age insurance, and childcare, and at the same time deepen the reform of land, finance and other factor markets to release the potentials of investment.

III.Handle well the relationship between tapping internal potentials and opening up. We should revitalize all forms of investment, redouble our efforts in developing digital economy, and encourage investment in new infrastructure, and create secure environment for people to consume free of worries, so as to promote further release of domestic demand potentials.

Contributed by Chen Ci, director of Economics Department, Party School of CPC Yunnan provincial party committee

Translated by Ren Meiqi