LONDON: China will head into 2026 facing an economic contradiction that will define its next five years: Beijing wants to direct massive resources to achieve technological self-reliance more quickly, while unleashing consumer-driven growth.
Beijing has finally recognised that consumption must become “the economic core” of its development strategy. The communique for the 15th Five-Year Plan (2026 to 2030) from the Fourth Plenum in October makes this shift explicit: “New demand will lead new supply, and new supply will create new demand.”
This phrasing represents a fundamental repositioning of consumption from consequence to driver of growth. Chinese economists I met in Shanghai during recent fieldwork described it as “long overdue rebalancing”, signalling internal consensus that the old model is exhausted.
The problem is that these goals require opposite approaches to managing the economy – and nowhere is that tension more visible than in how China allocates its vast pool of national savings.
TWO FUNDAMENTAL ECONOMIC PRINCIPLES
To understand why this matters, consider two fundamental economic principles that shape China’s dilemma.
First, investment is derived demand. Firms invest, building factories and buying equipment, because they expect demand for what they produce. So if household spending or external demand stay weak, investment cannot keep growing.
Some Chinese economists argued that China’s investment boom created its own demand through construction jobs and supplier spending. But that logic has fatal flaws: Debt-financed investment eventually hits limits, construction boosts disappear when projects finish and building infrastructure nobody uses doesn’t generate sustainable demand. China’s ghost cities and industrial overcapacity prove the point.
Second, incentives drive behaviour, especially in China’s state-directed system. For decades, local officials were promoted based on gross domestic product growth and investment volume, creating powerful incentives to chase headline numbers. This explains both China’s infrastructure miracle and its current problems of over-investment, hidden local government debt and the bursting property bubble.
For households, weak social safety nets, high housing costs and limited investment options to grow wealth create strong incentives for precautionary saving rather than spending.
These principles matter because China’s growth model has run out of road.
Real investment has surged from 28 per cent of GDP in 2001 to 40 per cent today, while real consumption remains stuck at just 41 per cent – far below the United States’ 69 per cent. Returns on investment have collapsed, bad debt is mounting, and manufacturing overcapacity has triggered trade tensions worldwide.
TWO GOALS WITH INCOMPATIBLE APPROACHES
But here’s the contradiction: Just as economic fundamentals force Beijing toward consumption-led growth, geopolitical competition intensifies the drive toward technological self-reliance – but the two priorities require incompatible approaches to managing the economy.
Genuine consumption-led growth would require Beijing to give up control. Specifically, it means redirecting income and wealth from state-owned firms and local governments to households; letting markets determine capital costs; and relying on the private sector to drive innovation. Most critically, it means accepting that households, not the state, for the most part decide where money flows.
Meanwhile, the race for technological self-reliance makes Beijing favour exactly the opposite. Maintaining artificially low interest rates – so the state can direct national savings toward “new quality productive forces” like advanced chips, AI and space technology – and the bursting of the property bubble keep household returns depressed, which suppresses consumption.
The Fourth Plenum communique positioned “high-level scientific and technological self-reliance” as the cornerstone of China’s modernisation. During visits to Shanghai’s Grand Neo Bay innovation hub, I saw this agenda taking concrete form.
The Bay has produced China’s first commercial carbon-monitoring satellite with fully homegrown technology and the world’s first successfully launched liquid oxygen rocket emphasising reusability and low costs. These achievements demonstrate China’s ability to innovate, manufacture, and commercialise critical technologies entirely within domestic systems.
They are proof that Beijing is serious about reducing dependence on foreign inputs precisely as US-China tech competition intensifies.
A DIFFICULT BALANCING ACT
China has always been comfortable managing contradictions. The Communist Party frequently discusses “principal contradictions” that must be balanced rather than resolved.
But the scale of required rebalancing makes this particularly acute. Boosting consumption meaningfully would require household income to rise from 61 per cent of GDP to nearly 70 per cent – a redistribution that necessarily comes at the expense of government revenues and state enterprise profits that currently fund technological ambitions.
Local governments would need to shift from infrastructure investment to social transfers. State-owned enterprises would face pressure to pay higher dividends to households rather than reinvest in industrial capacity.
China’s current approach is still far from this. Even consumption-boosting measures, like trade-in subsidy programmes, are aimed at soaking up supply and upgrading production capacity rather than stimulating household demand. They produce temporary spending bumps but no structural shift.
The most potent tool for boosting consumption – allowing market-determined returns on household savings – remains off the table. Raising deposit rates would immediately boost household income and reduce precautionary savings. But it would also drain resources from state-directed technological investment.
THE NEXT FIVE YEARS
The next five years will reveal whether Beijing can maintain commitments to both tech supremacy and consumption growth – or whether one goal inevitably undermines the other.
The most likely outcome is more of the same: unwavering commitment to technological self-reliance, framed as an existential issue. Even as it constrains household income growth, the consumption measures will be incremental and fall short of structural transformation.
For global markets, this contradiction has profound implications. A China that succeeds at rebalancing creates different trade dynamics and investment patterns than the export-dependent industrial powerhouse of recent decades. A China that fails risks policy oscillation, creating sustained uncertainty about the world’s second-largest economy.
The question isn’t whether Beijing wants consumption-led growth – the 15th Five-Year Plan makes that clear. The question is whether it can deliver while simultaneously pursuing technological supremacy. That tension will shape global economic stability through 2030.
Diana Choyleva is the founder and chief economist of Enodo Economics and a senior fellow at the Asia Society Policy Institute’s Center for China Analysis.