Why China isn’t doing more to boost domestic demand

One of the most frequently asked questions about China’s economy is deceptively simple: Why isn’t Beijing doing more to stimulate domestic demand?

The case for a large-scale stimulus appears compelling. China’s property market remains in a prolonged downturn. Consumer confidence is weak. Local governments are burdened with debt. Deflationary pressures persist, while demographic ageing and subdued private investment continue to weigh on growth.

Many economists – both inside and outside China – argue that Beijing should implement a much larger fiscal stimulus, strengthen the social safety net, raise household incomes, stabilise the housing market, and rebalance the economy towards domestic consumption.

Yet, Beijing has consistently resisted these recommendations. To many observers, this appears economically irrational.

But perhaps we are asking the wrong question.

The conventional debate assumes that China’s leadership shares the same objective as Western policymakers: maximising gross domestic product growth, employment, household consumption and economic welfare over the next few years.

Increasingly, that assumption no longer holds.

The Chinese leadership is optimising a different objective. Their overriding priority is no longer maximum short-term economic growth. It is the preservation of long-term national power in what Beijing increasingly sees as a prolonged strategic rivalry with the United States.

Understanding this shift helps explain not only China’s restrained macroeconomic stimulus, but also its industrial policy, technology strategy, military modernisation, supply-chain policies and financial reforms.

SEE ALSO

China’s dual-velocity economy: export ascendancy amid domestic stagnation

A tale of two Chinas

Resilience over returns: How China’s economic model sparks a rethink about global competition

Economic policy is no longer simply about managing the business cycle. It has become an instrument of grand strategy.

China increasingly operates according to a different set of priorities.

Rather than optimising for annual growth rates, Beijing appears to optimise for comprehensive national power – a broader concept that encompasses technological capability, industrial competitiveness, military strength, financial resilience, supply-chain security, scientific innovation, food and energy security, and geopolitical influence.

Growth as part of a grand strategy

This does not mean that economic growth has become unimportant. Rather, growth has become a means to a larger strategic end.

Economic policy is increasingly evaluated against one central question: Does it strengthen China’s long-term ability to compete with the US? This represents one of the most important changes in the Chinese political economy since Deng Xiaoping launched reform and opening in 1978.

For four decades, China’s governing philosophy was straightforward: economic development came first.

Rapid growth generated employment, rising incomes, technological upgrading, military modernisation, and political legitimacy. Economic success was itself the principal national objective.

Chinese President Xi Jinping has fundamentally reordered this hierarchy. His repeated formulation that “security is the prerequisite for development, while development is the guarantee of security” captures the intellectual foundation of contemporary Chinese policymaking.

The Chinese leadership increasingly believes that globalisation has entered a new era characterised by technological decoupling, export controls, financial sanctions, supply-chain competition and intensifying geopolitical rivalry.

The cumulative impact of semiconductor restrictions, technology sanctions, investment controls and military competition has convinced Beijing that dependence on foreign technology represents a strategic vulnerability – rather than merely an economic inconvenience.

Consequently, national security has become the primary framework through which economic policy is formulated.

China is not preparing for imminent war. But it is preparing for prolonged strategic competition. This distinction is critical.

Many of Beijing’s economic policies resemble those of countries engaged in long-term strategic mobilisation.

Priority sectors include semiconductors, artificial intelligence, robotics, advanced manufacturing, aerospace, quantum technologies, biotechnology, batteries and electric vehicles, renewable energy, critical minerals, and industrial software.

Viewed through conventional macroeconomics, some of these investments appear excessive. Viewed through the lens of national security, they represent investments in strategic resilience.

Just as industrial capacity determined military power during the 20th century, technological capability is increasingly viewed as the decisive source of power in the 21st century.

China’s leaders appear willing to sacrifice some short-term consumption if doing so strengthens the country’s strategic capabilities.

The cost of boosting demand

China’s industrial strategy has also evolved dramatically. Earlier policies sought to move Chinese firms into higher value-added manufacturing. Today, the objective is considerably more ambitious.

China seeks to build complete innovation ecosystems encompassing scientific research, engineering education, manufacturing clusters, financing, software, standards, commercialisation, deployment, and global supply chains.

This evolution is a new phase of industrial policy focused on comprehensive technological ecosystems rather than individual industries.

Equally important is China’s emphasis on “application scenarios”.

Rather than waiting for markets to adopt new technologies organically, governments actively create demand by deploying AI, robots, autonomous systems, drones and intelligent manufacturing across hospitals, ports, logistics, agriculture, factories and urban infrastructure.

Scale generates learning. Learning generates competitiveness. Competitiveness generates geopolitical leverage.

Industrial policy is therefore not simply about economic growth. It is about creating technological ecosystems that competitors will struggle to replicate.

Most economists recommend increasing household consumption. Economically, the logic is compelling: Higher household incomes, expanded pensions, improved healthcare, stronger social welfare and reduced precautionary savings would support domestic demand and rebalance China’s economy.

Yet, these reforms require significant fiscal resources.

Every yuan devoted to consumption is a yuan unavailable for semiconductor fabrication plants, AI research, industrial upgrading, defence technologies or strategic infrastructure.

This is the trade-off that economists often overlook.

Two economies, two priorities

China today effectively contains two economies.

The first is an innovative, globally competitive technology economy that leads in electric vehicles, batteries, renewable energy equipment, industrial robotics, drones, and increasingly, AI deployment and advanced manufacturing.

The second is a traditional macroeconomy constrained by property weakness, local government debt, demographic decline, subdued household consumption and weak confidence.

Western observers naturally focus on the second. Chinese policymakers increasingly prioritise the first.

This explains why China appears simultaneously to be experiencing macroeconomic weakness and technological dynamism.

The two developments are not contradictory. They reflect different policy priorities.

The real debate is not whether China should stimulate domestic demand. Nor is it whether Beijing fully understands conventional macroeconomics.

The real question is whether a nation can successfully compete in a prolonged technological and geopolitical rivalry while accepting slower growth, weaker household consumption, and persistent structural adjustment.

History offers no definitive answer.

China’s technological advances may eventually generate sufficient productivity gains to offset demographic ageing, weak consumption and the legacy of the property downturn.

Alternatively, prolonged underperformance in the household economy may ultimately undermine the very national strength Beijing seeks to build.

What is already clear, however, is that China’s leadership has fundamentally changed what it seeks to maximise.

Seen through this lens, Beijing’s restrained stimulus is not an anomaly. It is the logical consequence of a grand strategy.

The writer, an emeritus professor at Nanyang Technological University, is the former senior economist at the World Bank office in Beijing where he worked on the 11th Five-Year Plan with the State Council. This article reflects his opinion