China Is Making A Mistake Again
- 31.10.2025, 13:11
This way, Beijing will not achieve its desired goal.
China is in the midst of the planning season. The XVth Five-Year Plan (2026-2030) is expected to be officially released in March 2026, but judging by the results of the just-concluded Fourth Plenum of the Chinese Communist Party, it will be the same: the emphasis is on continuing China's incredible industrial and technological rise through, as Chinese President Si Jinping puts it, "new productive forces."
This is a mistake, and here's why: China's techno-industrial power is so well developed that there is nothing even to discuss. Planning should be focused on the country's most difficult task: carrying out the long-awaited rebalancing of the economy toward consumption. For this purpose, a clear target should be set in the XVth Five Year Plan to increase household consumption as a share of GDP from the current (according to the latest data) almost 40% to 50% by 2035.
The debate on this rebalancing has been going on for decades. The issue was first raised in March 2007 by former Premier Wen Jiabao. It was the second item in his famous "four don'ts" (unstable, unbalanced, uncoordinated, unsustainable) that he believed jeopardized the seemingly strong Chinese economy. Yes, the term "unbalanced" only indirectly refers to the topic of Chinese consumers. But in the context of all "four "don'ts," it raised the problem that later turned out to be the most important and structural one for the Chinese economy: we need to look for new sources of economic growth.
Chinese authorities showed remarkable skill in dealing with the first "don't" ("instability") - during the 2008-2009 global financial crisis and the Covid-19 pandemic. However, the fourth "don't" will be a reality check for Xi Jinping's political promise to realize the "China Dream." If economic growth proves unsustainable, China will not achieve its desired goal of becoming a "great modern socialist country" with a standard of living similar to that of developed countries by mid-century. According to my calculations, this would require China's real per capita GDP growth rate to reach 5.75% per year between 2030 and 2049, a significant acceleration from the 4.25% rate between 2022 and 2030 (though less than the average 8.4% rate between 1981 and 2021).
To achieve this is not easy, as many of the most powerful motors of China's economic growth have exhausted themselves. The real estate sector is struggling and will likely be stifled for years to come. China's export sector looks resilient, but will almost certainly suffer from increasing protectionism. Even the capacity for omnipotent capital investment, which now accounts for about 40% of Chinese GDP, is approaching its limits.
Ruling out one by one the available options, we get that the role of the engine of growth must be played by the Chinese consumer. This is a point I have been repeating since Wen first articulated the "four don'ts," but other experts have come to the same conclusion. When discussing economic objectives, the Chinese government always mentions the task of boosting consumer demand, but only among a host of other goals, from stimulating job growth and combating income inequality to developing alternative energy and domestic innovation. But China's economy is unbalanced, so it needs to focus strictly on one task - to strengthen the role of the Chinese consumer as a powerful engine of economic growth.
I am not saying that China should turn its back on all its achievements over the past 50 years, especially the latest technological advances. And I am not suggesting that China should return to the legacy of central planning and try to give the economy a different direction. In my view, targeting and planning are two different things. Planning defines an overall strategic framework, and targeting defines a target expressed in numbers and consistent with that framework. China can, as they say, both walk and chew gum at the same time - it can both plan and target.
I agree that raising household consumption to 50% of GDP will be difficult: I estimate that to do so, its growth rate must be twice that of the rest of China's economy. Such an outcome may seem improbable, but it is achievable given that housing, exports and capital investment statistics are expected to be weak.
China's consumption target seems similar to price stability or full employment targeting in the West. We call it "mandates," but that is just another word for targeting. Choosing a target level is useful in managing any economy because it concentrates efforts and increases accountability.
Summarize. It is time for China to openly define a target level for household consumption. What measures the Chinese leadership will choose to achieve this target is, of course, up to them. I have long suggested strengthening the social security system to reduce the overly high savings rate, reflecting the fears of a rapidly aging society. Other experts suggest focusing on reforming the outdated propiska ("hukou") system, especially for migrant workers, as well as raising the retirement age, developing a "silver economy" and (a new favorite of the authorities) exchange campaigns for consumer durables (trade-in).
Now I am less concerned with arguing about the most effective measures and much more concerned with setting a concrete goal of rebalancing the economy. Over the years, I have become convinced that China is excellent at accomplishing such tasks. If the 15th Five-Year Plan sets a clear target of bringing household consumption to 50 percent of GDP by 2035, I am confident that the authorities will then identify the right measures to stimulate consumption.
The new target will help the Chinese leadership address a problem that is causing a tedious but extremely urgent debate. As Wen astutely warned nearly 19 years ago, unless China's economy is rebalanced, its development will prove unsustainable.
Steven Roach, Project Syndicate