Stimulating consumption a three-tier challenge necessitating coordinated plan

If China advances these three dimensions in a coordinated manner — boosting consumption propensity, restructuring consumption patterns and activating consumer groups — the country could theoretically add around 25.5 trillion yuan ($3.56 trillion) in new consumption over the next five years.

Against the backdrop of an all-round effort to expand domestic demand with a particular focus on boosting consumption, household spending has become a primary driver of China's economic growth.

In 2024, total consumption by Chinese households accounted for about 40 percent of GDP, with the marginal propensity to consume (MPC) standing at around 66 percent — significantly lower than that of major developed economies.

Theoretical estimates suggest that, based on the current MPC of 66 percent, if the MPC rises gradually to 70 percent between 2025 and 2029, household consumption could increase by an additional 7.1 trillion yuan.

From a structural perspective, if the share of services in overall consumption climbs to around 53 percent over the same period, an extra 14.9 trillion yuan in consumption could be generated.

Furthermore, if rural income growth outpaces its historical average by 2 percentage points, another 3.5 trillion yuan in consumption could be unleashed.

Data indicate that China's consumption potential lies not only in raising the MPC, but also in tapping into structural opportunities — such as expanding services consumption and unleashing demand in smaller urban markets.

Analysis of data from 2000 to 2024 shows that China's current MPC is about 66 percent, compared with around 88 percent in the United States over the same period.

Historical data also show that the US' MPC has not been static but has fluctuated in stages, reflecting its nature as a behavioral parameter influenced by economic cycles, fiscal policy, social security systems and income expectations.

For example, the US' MPC declined in the mid-to-late 1960s amid inflationary pressures and fiscal tightening, but rose in the 1990s and early 2000s during economic expansion and wealth effects. In recent years, especially after the pandemic, enhanced fiscal transfers have also helped lift the MPC in the US.

These experiences suggest that the MPC is highly responsive to policy measures. Raising the MPC is not only feasible but can be achieved through sound institutional design.

Based on the current baseline, China's cumulative household consumption is expected to reach about 230 trillion yuan from 2025 to 2029. If the MPC increases to 70 percent over this period, consumption could expand by an additional 7.1 trillion yuan; if it rises to 75 percent, the total could reach 245 trillion yuan — 14.9 trillion yuan more than the baseline scenario.

Economic theories also provide insight. The absolute income hypothesis holds that current income mainly determines consumption, with MPC tending to fall as income grows. The lifecycle hypothesis stresses that consumption depends on lifetime income expectations and future economic security, meaning that current spending reflects not only current income levels but also uncertainty about the future.

Research shows that both social security spending and income distribution significantly influence the overall consumption rate. Specifically, the share of social security and employment spending correlates positively with the consumption rate (coefficient of 0.64), while the Gini coefficient has a significant negative effect (−1.69), both at the 1 percent significance level.

Higher social security spending strengthens income expectations and encourages consumption, while greater income inequality suppresses consumption by fueling precautionary savings, especially among low and middle-income groups. These findings underscore the importance of improving the social safety net and optimizing income distribution in efforts to raise the MPC.

In terms of structure, services consumption accounted for 43 percent of total household consumption in 2024, well below the 69 percent level in the US and other developed economies.

In recent years, services consumption has grown much faster than goods consumption, underscoring its role as a key driver of overall consumption expansion.

Theoretical estimates show that if the services consumption share increases from the current 43 percent to 51 percent by 2029, cumulative consumption over 2025-29 could reach 230 trillion yuan. A rise to 53 or 55 percent could add 14.9 trillion yuan and 29.8 trillion yuan, respectively, with total consumption reaching about 245 trillion yuan and 260 trillion yuan.

This highlights the strong multiplier effect of expanding services — such as cultural tourism, healthcare, education, elderly care and childcare — to meet diverse needs and unlock new growth drivers.

From an urban-rural perspective, analysis shows that rural households have a much higher MPC (86 percent) than their urban counterparts (55 percent), meaning that rural consumers are more inclined to spend additional income.

If rural disposable income maintains its average annual growth of the past 10 years of about 8 percent, cumulative rural consumption could reach nearly 58 trillion yuan over five years. Should growth accelerate to 10 or 12 percent, consumption would increase by 3.5 trillion yuan and 7.2 trillion yuan, respectively.

This underscores the importance of increasing fiscal rural transfers, enhancing agricultural value-added inputs, and supporting entrepreneurship and employment in less populated areas — not only as a pathway to common prosperity but also as a lever for unlocking consumption potential.

In an ideal scenario, without accounting for overlaps among the three growth drivers, China could theoretically release about 25.5 trillion yuan in additional consumption over the next five years if the MPC rises to 70 percent, the services consumption share climbs to 53 percent, and rural income growth outpaces its historical average by 2 percentage points.

Notably, the increase in the services consumption share alone could contribute 14.9 trillion yuan, making it the single most powerful engine for expanding domestic demand.

This is not only because of the low base and vast potential, but also because services consumption is closely linked to high-frequency, high value-added needs in education, healthcare, elderly care and cultural tourism.

To enhance both the level and structure of consumption, China should focus on developing services consumption and unleashing structural momentum.

Efforts should be made to advance supply side reform in the services sector, accelerate the rollout of quality service resources in education, healthcare, cultural tourism, elderly care and childcare, and also cultivate new services consumption scenarios.

At the same time, the social security system should be strengthened. Accelerating the unification of the national pension system, expanding the coverage of unemployment and medical insurance, and advancing the development of long term care insurance will reduce precautionary savings and improve income expectations, thereby unlocking stronger consumption.

Reforms to the income distribution system are also needed to bolster the foundation for consumption. Expanding the size of the middle income group and enhancing its spending power and confidence will help lift the overall MPC.

In addition, stronger support for rural consumption is crucial to tapping into lower tier markets. Advancing integrated urban-rural development, improving rural infrastructure and public services, and boosting rural incomes will further enhance spending power and expectations in rural areas.

Cheng Shi is chief economist at ICBC International Holdings Ltd, and Xu Jie is a macroeconomic analyst at the company.

The views do not necessarily reflect those of China Daily.