Stimulating domestic demand high on agenda

The 2026 Government Work Report identifies the development of a strong domestic market as the top priority for China's economic agenda this year. At a time when the global economy is undergoing profound changes, rising unilateralism, increasing trade protectionism and persistent geopolitical uncertainties are creating greater instability for external demand.

Against this backdrop, expanding domestic demand has become a strategic anchor for China's economic resilience. The report stresses the need to expand domestic circulation and strengthen the internal drivers of growth in order to better withstand external shocks.

Within this framework, effective investment plays a central role in building a strong domestic market. The Government Work Report calls for coordinated efforts to boost consumption and expand investment, while emphasizing the need to fully unlock the potential of effective investment and leverage China's ultra-large market advantages.

As one of the two key components of domestic demand, alongside consumption, investment remains equally important for sustaining long-term growth.

In China's economic development model, consumption represents the ultimate goal, while investment serves as an essential means to achieve it. The people-centered nature of economic growth is reflected in the continuous expansion of consumption, which remains a top policy priority in efforts to expand domestic demand.

However, sustained consumption growth cannot be achieved without investment. Consumption heavily relies on investment-driven capital accumulation and income growth across society. At the same time, new forms of investment generate new supply, which in turn creates new demand. This dynamic interaction between supply and demand has become increasingly important in China's development strategy.

The outline of the 15th Five-Year Plan (2026-30) emphasizes the need to use new demand to guide new supply and new supply to create new demand, promoting a virtuous cycle between consumption and investment, as well as achieving a higher-level dynamic balance between supply and demand.

It also calls for integrating investment in physical assets with investment in people, and for greater emphasis on consumption-boosting and livelihood-related spending in fiscal policy.

When consumption is relatively weak, investment tends to account for a larger share of economic activity, helping to stabilize growth. As a developing economy with a large population, China still has significant room for investment-led development.

Although China's total economic output ranks among the highest in the world across multiple indicators, per capita levels remain relatively low in many areas. For example, while China's total electricity generation has long ranked first globally, per capita power generation remains less than 60 percent of that of the United States.

Against the backdrop of rising demand from artificial intelligence and digital technologies, investment in power supply capacity remains an important area of development.

At the same time, increasing global uncertainty and supply chain risks highlight the need for China to strengthen domestic industrial chains and reduce potential "bottleneck" constraints.

Even in the relatively weak property sector, there remains significant demand for improved housing conditions, requiring continued investment in better-quality residential development.

Taken together, these factors indicate that China still has broad upside potential for effective investment to address structural shortcomings in its development model.

A key issue in expanding effective investment lies in how investment returns are evaluated. Misunderstanding or incomplete assessment of investment returns can lead to a weakening of investment incentives.

In practice, investment returns can be understood through three layers: micro returns, regional social returns and national strategic returns.

Micro returns refer to direct financial returns of an investment project, typically measured by cash flow and internal rates of return. This is the most commonly used metric in market-based investment decisions. If expected returns exceed financing costs, the project is considered viable; otherwise, it is not.

However, focusing only on micro returns overlooks broader social benefits.

"Regional returns" refer to the broader economic and social value created within a local area. Infrastructure investment — such as roads, subways and public parks — often falls into this category. While such projects may not generate high direct financial returns, they significantly improve urban functionality and quality of life.

Beyond this, there are also "national returns", which reflect the strategic and long-term benefits of investment at the country level. These include contributions to employment, economic stability, regional coordination and national security.

For example, transportation infrastructure projects ranging from rural road networks to major railway lines in western China play an important role in promoting rural vitalization and balanced regional development.

Different types of investors naturally focus on different layers of returns. Market entities typically prioritize micro returns, as they operate under commercial principles. However, if all investment decisions are guided solely by micro profitability, socially beneficial projects with weak financial returns may be underfunded or neglected.

This is particularly relevant in infrastructure development. Many infrastructure projects are not financially profitable at the project level, yet they generate substantial social and economic benefits. Without government involvement, such projects often struggle to obtain financing.

China's infrastructure development experience demonstrates the importance of taking into account both regional and national returns. The practice of local governments engaging in urban development has played an important historical role in mobilizing investment.

In China, public ownership of land has also provided a unique institutional foundation. As urban infrastructure improves the quality of life in cities, it also increases the value of land held by local governments, allowing part of the social value created by infrastructure investment to be realized through fiscal channels.

This mechanism has enabled many local governments to balance costs and returns across both micro and regional dimensions, forming a sustainable model for infrastructure financing and urban development.

Another important dimension of investment concerns debt and financial sustainability.

China's investment-to-GDP ratio has remained significantly higher than the global average for a long period. Since investment necessarily involves financing, and China's financial system is predominantly debt-based, investment growth is closely linked to rising debt levels.

However, concerns about debt risks should not be assessed solely by looking at the absolute size of debt. A more important factor is the relationship between domestic savings and debt demand.

In a "savings-debt market", savings represent the supply of capital while debt represents demand for capital. If savings are in surplus relative to borrowing demand, then even a high level of debt does not necessarily point to high risks.

China is a high-savings economy. The International Monetary Fund estimates that China's savings rate in 2025 was around 42 percent, nearly double the global average of 23 percent. At the same time, China's net international investment position exceeded $4 trillion, indicating a large accumulation of overseas assets.

Against this backdrop of excess savings, China's relatively high debt level does not necessarily translate into high systemic risks.

Concerns about local government debt are also often linked to incomplete consideration of regional and national returns on investment. While infrastructure projects may appear unprofitable at the micro level, their broader economic and social benefits are significant when assessed from a wider perspective.

In recent years, China has strengthened efforts to manage local government debt risks, including the implementation of a comprehensive debt restructuring package and the replacement of hidden debt. The Government Work Report also proposes further optimization of local government bond issuances to support project financing.

The Government Work Report outlines a range of policy tools aimed at expanding effective investment.

On the government side, China plans to allocate 755 billion yuan ($112 billion) of central budgetary investment and 800 billion yuan from ultra-long special treasury bonds for major national strategic projects and security capacity-building initiatives. Standards for central investment subsidies will also be adjusted to better support priority areas.

At the local level, the issuance quota of special-purpose bonds will be increased and better aligned with regions that have well-prepared projects and demonstrate efficient use of funds.

In addition, China plans to issue 800 billion yuan in new policy-oriented financial instruments to mobilize more private capital for investment.

The writer is chief economist at BOC International.

The views do not necessarily reflect those of China Daily.