Liu Shijin: Insufficient terminal demand "bottlenecks" the growth; a new framework is needed for expansion

Addressing insufficient terminal demand is becoming a key breakthrough in the current transition of the economic structure.

“China achieved its target of around 5% economic growth in 2025, and the results are not easy. But what is worth paying attention to is that over the three-year period from 2023 to 2025, China’s actual GDP growth rate has remained at 5% or above, while its nominal growth rate has continued to be below its actual growth rate, and the gap between the two has been widening year by year.” Liu Shijin, a member of the expert committee of the National “Fifteen-Five” Plan, and the former deputy director of the Development Research Center of the State Council, said: The economy has shifted from supply constraints to demand constraints. This means that, from a macro perspective, the growth rate looks fine, but at the micro level, businesses find it difficult to operate and residents do not experience a strong sense of income gains—leading to a “temperature gap” between the macro and micro levels.

Liu Shijin emphasized that a problem encountered over a fairly long period in the past was insufficient supply. During the “Fifteen-Five” period, what needs to be addressed is insufficient demand, which requires a new framework for economic growth. In his newly compiled book, Outlook on the “Fifteen-Five”, Liu Shijin points out that during the “Fifteen-Five” period—or even longer—the drivers of economic growth will shift from being driven by investment and exports to being mainly driven by innovation and consumption. Deepening structural reforms will still remain the key move for driving development.

Insufficient terminal demand shows up in economic data. One typical manifestation is that the GDP deflator (the ratio of nominal GDP to real GDP) has remained sluggish. As of the end of 2025, this index has been in negative growth for 11 consecutive quarters. Liu Shijin explained that when nominal growth is lower than actual growth, fundamentally it reflects that the market does not sufficiently recognize output. This directly leads to a series of problems, including overcapacity, increased inventories, more frequent arrears of funds, a rise in corporate debt ratios, reduced cash flow, and falling profits, among others.

“Residents and businesses deal with nominal growth in their day-to-day lives. When nominal growth is lower than actual growth, their real purchasing power and operating returns are both affected. This is also the issue that needs to be addressed as a priority in the current economic operations,” Liu Shijin said.

“Insufficient ‘terminal demand’ is the core problem

When analyzing this core issue of insufficient demand, Liu Shijin clearly pointed out that the key to insufficient demand today is not investment and exports, but consumption. He emphasized that the share of consumption in GDP by Chinese residents differs from the global average by about 20 percentage points. This gap did not emerge recently; it has long existed, but in recent years it has been gradually exposed during the process of economic growth.

From the perspective of consumption structure, the overall gap in goods consumption is not large. The main shortfall lies in development-oriented consumption related to basic public services, including areas such as education, healthcare, housing, social security, elder care, and others. From the perspective of different groups, the most prominent shortfall in development-oriented consumption among rural residents and nearly 200 million migrant workers who have moved into cities. Behind this are deep-seated factors closely related to the urban-rural dual structure, relatively low levels of basic public services, and larger income disparities.

To interpret more precisely the relationship between consumption and economic growth, Liu Shijin proposed the concept of “terminal demand.” GDP, as the sum of value added across the whole society for the year, is referred to as the “final product,” but in reality it is not a final product in the natural sense—it is necessary to strip out productive investment (investment that will re-enter the production process). Terminal demand is the sum of consumption and non-productive investment. The latter mainly includes real estate related to people’s livelihoods, infrastructure construction, and investment in parts of the services industry. For a long time, real estate and infrastructure have grown at high speed. From an international comparison, in practice there have been issues of some overly forward-looking investments. In recent years, real estate has fallen sharply and infrastructure construction has also slowed down. The consumption structural bias that had been covered up has come to the surface, becoming a shortfall with a “choke point” in terminal demand.

Liu Shijin emphasized that the slowdown in terminal demand growth and its relative contraction are the main reasons leading to macroeconomic slowdown, intensifying overcapacity, and nominal growth falling below actual growth. Expanding consumption must distinguish between source-side problems and derivative problems.

Liu Shijin further analyzed that the economy currently faces many real issues, including weak prices, heavy local government debt burdens, consumption downgrades among urban white-collar groups, and severe overcapacity, all of which are derived from insufficient terminal demand.

To expand consumption, attention and focus should be placed on solving the source-side problem of a structurally low consumption share in terminal demand. Only by bringing terminal demand up to a reasonable level can the economy have a continuous source of fresh impetus from the source side, and many derivative problems can be resolved. This is the fundamental principle for solving insufficient demand. Therefore, stimulus policy funds should also focus on addressing source-side problems—using the right steel for the blade—so as to achieve twice the result with half the effort.

The height and width of economic growth

In the 2026 Government Work Report, the economic growth target is set at 4.5%–5%. At the same time, it emphasizes that “promoting stable economic growth and a reasonable rebound in prices” is an important goal of monetary policy. Liu Shijin analyzed that from the perspective of fiscal policy, this year’s deficit ratio is set at 4%, with a scale of 5.89 trillion yuan. In addition to 1.3 trillion yuan of ultra-long special treasury bonds and 4.4 trillion yuan of local government special bonds, fiscal stimulus funding will be no less than 12 trillion yuan.

Liu Shijin pointed out that the core goal of these funds is to address the problem of nominal growth lagging behind actual growth, striving to make nominal growth at least match actual growth or be slightly higher. This requires improving the efficiency of using policy tools and directing more funds to sectors where terminal demand is insufficient, so that the stimulus effect can be realized more effectively.

Liu Shijin proposed a research framework of “the height and width of economic growth.” He explained that “height” refers to raising total factor productivity through innovation, reform and opening-up, and strengthening management—determining the economy’s potential growth rate. “Width” refers to different parts among all members of society—for example, dividing them into ten groups—and to what extent they can form effective demand for existing productive capacity. “Height” determines the growth rate that is possible to achieve, while “width” determines the actual growth rate that can be realized.

“From this, we can explain a puzzling phenomenon in current economic operations: why do innovation and new industries appear to develop well, but the economic growth bears tremendous pressure,” Liu Shijin said.

Regarding the conversion of growth drivers during the “Fifteen” period, Liu Shijin proposed that China’s economy needs to shift from being driven primarily by traditional investment and exports to being driven mainly by innovation and consumption. He emphasized that this transition needs to grasp three key points: first, place importance on terminal demand, stabilize and expand terminal demand, and on that basis assess capacity conditions. In areas where capacity is insufficient, make effective investments; avoid blindly launching new projects in areas with overcapacity; and prevent the formation of new debt burdens. Second, clarify the relationship between investment and consumption: only when consumption and terminal demand rise can effective investment keep up. Third, rely on China’s three major advantages—catch-up potential advantage, the advantage of new technology revolutions, and the advantage of a super-large market economy—and implement strategies to build a strong manufacturing country, a strong consumption country, and a strong financial country, thereby constructing a new growth framework.

The growth logic of the “Fifteen-Five”

The “Fifteen-Five” period is a crucial time for China’s economic growth to cross the threshold of high-income countries and to lay a solid foundation for basically realizing socialist modernization. Liu Shijin said that during the “Fifteen-Five” period, China must move out of the existing growth framework, establish a new framework, and see major, even turning-point, changes in the internal and external environment for development, the conditions of demand and supply, and growth drivers.

In terms of upgrading the consumption structure, Liu Shijin put forward three recommendations: first, fill the shortfall in consumption’s share of GDP, aiming to reach the global average level, so that China can truly become a country with strong consumption. Second, enhance the internationalization level of consumption—consume domestic products and services, and also expand consumption of overseas products and services. Third, place importance on development-oriented consumption. Clarify that development-oriented consumption such as education, healthcare, and elder care is both consumption and investment in human capital, and that by improving the quality of human capital, development oriented by innovation can be supported.

In terms of upgrading the industrial structure, Liu Shijin emphasized that implementing the strategy to build a strong manufacturing country is not about maintaining a fixed share of manufacturing. It is about promoting the transformation and upgrading of manufacturing, focusing on developing productive services, and using composite indicators of “manufacturing + productive services” to measure the effectiveness of the transformation and upgrading. As the economy enters an innovation stage, the effectiveness of government industrial policies based on past experience will decline. It will therefore become even more important to cultivate a business environment featuring fair competition.

In the field of foreign trade, Liu Shijin analyzed that in 2025, China’s merchandise trade surplus reached 1.1 trillion US dollars, demonstrating China’s economic competitiveness. However, it also reflects a problem of contraction in domestic consumption: in practice, the trade surplus actually represents the conversion of part of domestic consumption into overseas savings. In the long run, trade should achieve basic balance. The next step should be to expand imports while enhancing export competitiveness, and to promote settlement and payment in RMB—thereby expanding the scale of offshore RMB and improving the RMB’s international status. He pointed out that currently, China’s real economy accounts for 17%–18% of the global total, and the share of manufacturing exceeds 30%. But the RMB’s share in international pricing, payment and settlement, and reserves is still below 5%, which is seriously inconsistent with its position in the real economy. Expanding the scale of offshore RMB is an important way to address this issue.

In terms of financial structure adjustment, Liu Shijin believed that China’s society-wide net assets have reached a relatively large scale. In 2022, they reached 756 trillion yuan, and the ratio of national income to social net assets is close to that of advanced economies, around 1:5–1:6. As the value of real estate investment declines and bank deposit interest rates fall, a large amount of residents’ assets will move into the capital market, providing new sources of funds for the development of the capital market. In the future, the capital market should cultivate leading technology companies and innovation-driven small and medium-sized enterprises on the asset side. On the investment side, it should increase the proportion of long-term institutional investors such as pension funds. This can both support innovation-driven development and help residents increase income from property-related assets, thereby promoting consumption.

In terms of income distribution and tax reform, Liu Shijin proposed that China’s income gap is currently large, and the Gini coefficient should make efforts to fall below 0.4. The size of the middle-income group needs to be expanded from the current 400 million people to 800 million–1 billion people. Tax reform should shift away from a system dominated by production-stage consumption taxes (such as value-added tax) and place greater emphasis on income taxes and property taxes.

Regarding macro policy, Liu Shijin pointed out that the core of macro policy is to solve macro imbalances. It cannot solve deep-seated problems in resource allocation, and one should not place hopes on the idea that “the looser the policy, the better.” China’s macro leverage ratio has already exceeded 300%, second only to a few economies such as Japan. Macro policy easing needs to observe boundaries. More importantly, it is necessary to advance structural reforms to resolve deep-seated structural and institutional contradictions.

Liu Shijin emphasized that local governments, in their development plans, should reduce excessive reliance on investment and projects, pay more attention to consumption and people’s livelihood needs, actively explore through pilot programs and play a demonstrative and leading role, so as to organically combine maintaining stable economic operation in the short term with high-quality development in the medium to long term.

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