China's rapid economic growth over the past 40 years of reform and opening-up has produced two world-class effects: first, China's exports of labor-intensive products help countries ease inflationary pressures; second, China's strong demand for commodities support many economies' continuous growth. As China's economy enters a new stage, the country's next world-class economic influence will likely come from its massive consumer market.

The goals of China's economic development in the new stage include: reaching a moderately developed level by 2035, and achieving the second centenary goal by 2049. Achieving these goals all depend on high-quality economic development. In economics, high-quality development means improving efficiency and technological progress, rather than extensive growth.

Currently, China's manufacturing cost advantage is waning, while the country's demand for commodities is not as strong as before. As China reaches higher income levels, it needs to produce more products with higher added value, technology and quality to maintain its international competitiveness. Therefore, China's future economic growth needs to be more focused on innovation. Meanwhile, the globalization trend has been reversed, China's economy needs to be driven more by the domestic market.

In face of a changing international environment, China's policymakers proposed the "dual circulation" development strategy, namely focusing on the domestic economy and features positive interplay between domestic and international economic flows. As for the domestic flow, the key is to promote the circulation of supply and demands.

On the supply side, China's GDP per capita has grown from $200 at the beginning of reform and opening-up to $12,741 in 2022. Living standards have seen significant improvement. With rising labor costs, China needs to produce products match the rising costs to maintain its competitive edge in international markets. 

The core of the supply side is how to promote innovation. In economics, innovation is ultimately reflected in the increase of total factor productivity, the continuous improvement of product quality, and the continuous increase in the proportion of added value of products, that is, the realization of high-quality economic development. In this sense, the core issue of the new economic model is whether innovation can be realized. Only by innovating can supply continue to grow.

The demand side is mainly linked to consumption. China's economy already has relatively strong investments, growth in consumption is of great significance to sustainable economic growth. After the global financial crisis in 2008, China has been emphasizing strengthened domestic demand to underpin economic growth.

Consumption should have an appropriate share of each economy, because without consumption demand, investment will become excess capacity, and ultimately growth cannot be sustained. China's investment is strong and consumption is relatively weak, but why has the problem of overcapacity not occurred? Because most of the products are exported overseas, especially the US. 

The US has strong consumption but insufficient investment, while China is just the opposite, and the two complement each other. When the US and Chinese economies complement each other, imbalances in both economies are hedged. However, the past practice of absorbing domestic excess capacity through exports will become less effective in the future, because the export situation has changed and the proportion of consumption in the economy needs to increase.

What is the appropriate proportion of consumption in the economy? A comparison can be made with other countries. At present, China's consumption accounts for about 55 percent of GDP, Japan's proportion is about 75 percent, and that of the UK and the US are more than 82 percent. If China's proportion reaches 75 percent, it will have a huge impact on the Chinese economy and even the world economy. 

The next world-class influence of the Chinese economy will likely come from the Chinese consumer market. The market, which is underpinned by a population of 1.4 billion, an expanding middle-income group that exceeds 400 million, is approaching the threshold of a high-income economy. If the national income can continue to grow, the most exciting story in the future will happen in China's consumer market. China's consumption can not only achieve a virtuous circle with supply innovation, continue to promote China's economic growth, but also attract the attention of producers all over the world.

Of course, this is an optimistic expectation. The question is how China can effectively stimulate its domestic consumption. China could consider the following measures: First, increase the proportion of residents' income in national income through primary distribution, reduce the proportion of the government and state-owned enterprises in the overall income distribution. Second, increase the equality of income distribution among families, which requires the government to introduce appropriate redistribution policies. Third, establish a sound social security system to support consumption. Fourth, promote urbanization. We once did a study and found that the average annual consumption of urban residents is three times higher than that of rural residents.

Population aging and decline will drag down China's social consumption demand over the next 30 years. However, if factors such as income growth, improvement of social security, optimization of income distribution and advancement of urbanization are taken into account, China's consumption will still have a strong growth potential. 

The growth of China's mass consumer market not only benefits Chinese producers, but also producers around the world. With the continuous improvement of the living standards of the Chinese people, the demand for a better life continues to increase, the rising demand for quality of products and services will continue to increase, and a world-class economic development opportunity will be created.

(From: Global Times, 25 Mar, 2023. The article was compiled based on a recent speech of Huang Yiping, deputy dean and Sinar Mas chair professor of finance and economics at the National School of Development, Peking University)