China's core strategy for beating the US economically: consumption growth.
Economists fret over the possibility of trade confrontations on multiple fronts.
In this briefing:
Growth in consumer demand is now viewed as a strategic imperative by China’s top economists.
China could face trade threats on multiple fronts, given both US alliance building and trade surpluses with a sizeable number of other economies.
A senior central bank official argues that contrary to Keynesian economics, consumption growth in China could create a "positive cycle" for domestic demand by also boosting investment.
Multi-decade data for capital formation and consumption in China and the US tells a tale of striking contrasts.
China's top economists point to growth in consumption and domestic demand as a key strategic means for overcoming the US economically, following the intensification of trade tensions since Trump's second term in office.
Instead of relying on investment growth, they advocate giving greater support to household consumption, with a particular focus on consumption of services.
Domestic demand is China's strategic imperative
Beijing has placed heavy emphasis on growth in domestic consumer demand since the start of 2024, with the launch of its "cash-for-clunkers" subsidies for household purchases of vehicles and home appliances.
These measures stepped up in the second half of 2024, and have further expanded since the start of 2025.
Trump's election win at the end of last year further heightened Beijing's urgent push for growth in domestic demand.
Its Central Economic Work Conference held in December made "vigorously spurring consumption and comprehensively expanding domestic demand" the top economic priorities for 2025.
In the wake of the Trump administration's Liberation Day tariffs, a leading Chinese economist writes that "Expanding Domestic Demand Isn't a Stopgap Measure, But a Strategic Manoeuvre" ("徐奇渊：扩大内需不是权宜之计，而是战略之举").
Xu Qiyuan (徐奇渊), a researcher from the World Economy and Politics Research Institute at the prestigious Chinese Academy of Social Sciences, says that the agreement announced by Beijing and Washington trade representatives in Geneva on 12 May no doubt managed to "surpass market expectations."
"The US has obviously abandoned its fantasy of complete decoupling from China.”
Xu argues, however, that this has in no way diminished the urgent need for China to expand domestic demand, with a view to reducing its vulnerability to overseas uncertainties and correcting structural economic imbalances.
"The strategy of expanding domestic demand is the key move for the internal markets of a great power,” he wrote.
"It relates to both economic stability, as well as economic security.
“This absolutely isn't a stopgap measure, but is in fact a strategic manoeuvre."
He highlights continued uncertainty surrounding the policy decisions of the Trump administration, as well as its hard stance on technological exports.
"Despite reaching a tariffs agreement, the relationship between China and the US will face many tests," Xu wrote.
"On 13 May, the US president announced a new ban on AI, further restricting the export of AI chips to China and the development of China's AI sector.
"From this, we can see that Sino-US relations still suffer from fundamental challenges."
China faces trade threats on multiple fronts
Xu notes that the US is not the only economy that could impose tough trade measures against China - particularly if Washington seeks to enlist other nations in an economic alliance against Beijing.
"In recent years, China and the US have been actively competing for the support of [other] nations - and in the past several months this has become even more pronounced," he wrote.
"According to WTO data, only 34% of trade protectionist measures applied to China come from the US, with nearly two-thirds from other countries."
China runs a trade surplus with 120 out of its 160 trading partners. These imbalances were a key focal point for European trade representatives during recent discussions with Beijing.
They expressed concern over the possibility that US tariffs against Beijing could further worsen EU trade imbalances, should China choose to redirect its exports towards the European market.
Xu sees increasing domestic demand as the antidote to this issue, by helping to iron out such imbalances with an increase in Chinese imports.
"We need to change our thinking and focus on driving a more balanced form of opening," he wrote.
"How can we achieve this balance? Expanding domestic demand is one of the most critical measures."
Balanced trade relations with other powers will also serve China's geopolitical ends, by, in Xu’s own words, "helping to expand an international united war front."
"Under current circumstances, this appears especially imperative," Xu wrote.
Services consumption to play key role in demand growth
Even without the Sino-US tariff war or uncertain trade relations with other nations, inadequate domestic demand has long been viewed as the key challenge for the Chinese economy.
"Prior to Trump assuming office, the problems of inadequate domestic demand and weak consumption were already apparent," Xu wrote.
This remained the case in the first quarter of 2025, when China's GDP deflator hit its eighth straight month of negative prints.
Data from the start of April indicated that goods prices were still under pressure, in a sign of key structural problems when it comes to supply-demand dynamics.
"This issue already existed when the reciprocal tariffs were launched," Xu wrote.
Xu considers the core solution to the domestic demand dilemma to lie in giving greater play to services consumption.
He also highlights the need for reforms to achieve more equitable wealth distribution within China, that could help to spur household spending.
"Once basic needs are satisfied, demand for services consumption is quick to grow.
"Additionally, the progress of reforms relating to income distribution, social welfare, the household registration system, state-owned enterprises and land transfers affect optimisation of resource allocation and the release of consumer demand."
Consumption can create a "positive cycle" for investment
Sheng Songcheng (盛松成), the former head of the Chinese central bank's statistics department, argues that consumption growth could also help to boost domestic demand by driving investment.
He writes that Keynesian economics has created the common misconception within China that consumption and investment can only grow at each other’s expense.
"The Keynesian analytical framework of aggregate demand is widespread, and for this reason, end demand is broken down into the 'three horses' of consumption, investment and net exports,'" Sheng wrote in a recent opinion piece ("盛松成：消费如何促进投资并形成良性循环").
"However, this three-part breakdown is a static analytical method. When debating whether consumption or investment is more important, it's likely to create misconceptions.
"Looking at their rates of contribution to GDP growth, it's often the case that consumption and investment rise as the other falls.
"For this reason, it's easy to mistakenly believe there is a mutually exclusive relationship between the two, which means there's no room to show their mutually supporting relationship."
Sheng argues that consumption and investment should instead be viewed as "spurring each other ahead like the dual helix structure of DNA."
How consumption can drive investment
Sheng acknowledges that there can be a competitive relationship between investment and consumption when it comes to resource allocation.
This is because when households use their income for investment or saving, it reduces their spending on everyday consumption.
The excessive use of fiscal expenditures for certain types of public investment can also crowd out spending that fosters household consumption, in the form of social welfare and consumer subsidies.
At the macro-level, however, Sheng’s opinion is that investment and consumption are mutually reinforcing.
When enterprises increase investment, this will often create more employment opportunities and raise incomes, serving to further boost consumption.
Investment also often accompanies technological innovation or productivity gains, leading to supply expansions that can reduce consumer prices or increase new product supplies, which further spurs consumption by households.
Conversely, Sheng argues that strong consumer markets often spur investment, because investment is based upon expectations of returns on capital.
These are in turn driven by the sales and profit expectations of enterprises based on consumption forecasts.
"As the preferences of households change and demand increases, enterprises need to continually invest in R&D and technological upgrades to satisfy consumer demand," he wrote.
"For this reason, consumption demand serves as the foundation, and under the conditions of a market economy, this makes it easier to discover investment with rational returns, which raises the efficiency of the economy and drives growth in its aggregate scale"
Chinese and US consumption and investment compared
A comparison of the investment and consumption levels of the world's two biggest economies reveals a multi-decade tale of striking contrasts.
US capital formation has held relatively steady at 20 - 26% of GDP for the past four decades, according to data from the World Bank.
For China, however, capital formation was high even during the Cultural Revolution, and further rose during the first three decades of the Reform and Opening era that kicked off in the late 1970s.
It stood at 31% of GDP at the start of the 1970s, before rising to 46.7% in 2011.
Since then, China's capital formation has held steady at around 43% of GDP.
Consumption levels show the opposite picture, with US consumption accounting for 75.75% - 85.13% of GDP over the past four decades.
Chinese consumer expenditures have fallen steadily as a share of GDP since 2000, from 63.6% to 48.9% by 2010, before posting modest gains subsequently.