Liu Shijin: China Saves Too Much to Grow
Former Deputy Director of the State Council's top think tank urges Beijing to treat weak consumption as a macro emergency, not just a livelihood issue
On July 15, China’s National Bureau of Statistics released economic data for the first half of the year, showing GDP growth of 4.7% year-on-year. The figure also helps explain Premier Li Qiang’s remarks at an economic roundtable two days earlier, where he called for stepping up counter-cyclical adjustment and making full use of existing policy tools to shore up the macroeconomy.
To my mind, however, what made the meeting interesting was the guest list. Alongside the usual macroeconomists sat Yu Donglai, a private entrepreneur who runs a department store and retail business. Unlike so many of his peers, who seem to have faithfully inherited the “Protestant ethic” of Max Weber’s telling and treat moneymaking as a calling in itself (and I’m not planning to point out a name), Yu pays his employees wages far above the local average and shares the company’s profits with the entire workforce. At a moment when weak household consumption has become the economy’s problem number one, giving such a businessman a seat at the table is a policy signal in itself.
Liu Shijin has been making a similar argument from a different angle. A former Deputy Director of the Development Research Center of the State Council (DRC), a top policy research and advisory body serving China’s central government, Liu is long regarded as one of the country’s most influential economists. In recent years, he has emerged as a prominent voice urging Beijing to shift its policy focus toward boosting household consumption, narrowing income gaps, and raising rural residents' pensions.
Liu believes that under a “tournament-style” competition model, local governments competed intensely around GDP targets. Combined with the export-oriented economies of coastal provinces, this sustained rapid investment growth over a long period under the earlier conditions of a shortage economy marked by insufficient supply. The structure of high savings and low consumption also provided, in objective terms, a funding source for large-scale investment in a catch-up economy, while during the period of medium to high growth, the rapid expansion of real estate and infrastructure masked the structural deviation of a persistently low consumption share of GDP.
As real estate slumped and local infrastructure spending decelerated, the long-hidden consumption shortfall was laid bare. With excessive productive investment driving capacity utilization and returns on investment steadily lower, the mechanisms embedded in this model, including excessive income disparities among households and low dividend payouts by enterprises, have suppressed society’s overall capacity to consume. The contraction of end demand is now, in turn, eroding the foundations of investment growth, and the old development model has become unsustainable.
On policy, Liu argues that the breakthrough should focus on reforming the savings and consumption formation mechanism to convert excess savings into effective consumption, and he proposes three quantitative targets. First, within roughly three years, the economy-wide savings rate should be brought below 40% and the corporate savings rate below 20%. The direct route is to raise corporate dividend payout ratios, including transferring around RMB 20 trillion of listed state capital, out of a total A-share market value of roughly RMB 120 trillion, into the social security fund, while also encouraging private enterprises to increase dividends. Second, tax reform focused on personal income and property taxes should be advanced steadily to bring the Gini coefficient gradually down to 0.4 or below, thereby raising society’s average propensity to consume and lowering the household savings rate. Third, the center of gravity of macroeconomic management and government functions should shift from the supply side to the consumption side, with more than half of macro stimulus spending devoted to building the social security system for low- and middle-income groups. Priorities include resolving the housing difficulties of migrant workers and other new urban residents, and markedly raising pension levels under the basic pension scheme for urban and rural residents, which covers 550 million people. In his view, this is a livelihood issue, but even more, it is an urgent requirement to restore investment and stabilize macroeconomic growth today.
Below is the English version I made with the help of AI:
Liu Shijin: Deepening Reform of the Savings–Consumption Formation Mechanism to Reverse the “Strong Supply, Weak Demand” Imbalance
The imbalance between strong supply and weak demand is a major challenge facing China’s efforts to stabilize growth at the current stage. The 2025 Central Economic Work Conference stated explicitly that the contradiction between strong domestic supply and weak demand is pronounced, and that insufficient effective demand is the salient sticking point in the current economy. This imbalance stems from a lopsided growth model underpinned by a series of institutional and structural factors. To reverse it as quickly as possible, attention and the point of breakthrough should be directed toward deepening reform of the savings–consumption formation mechanism, substantially lowering the savings rate, and correspondingly expanding end demand.
I. Manifestations of “Strong Supply, Weak Demand” and Its Deeper Causes
“Strong supply, weak demand” refers to a set of seemingly contradictory phenomena frequently observed in reality—often described as a K-shaped pattern of development. On one hand, innovation is thriving, with major advances in artificial intelligence, robotics, and green technology; on the other, economic growth remains under sustained pressure, with nominal growth running below real growth. Exports have grown extraordinarily—the goods trade surplus reached a record of nearly USD 1.2 trillion in 2025—yet insufficient domestic demand continues to worsen: investment contracted for the full year of 2025, was down 4.1% year-on-year cumulatively in the first five months of 2026, and total retail sales of consumer goods fell 0.6% year-on-year in May. China’s manufacturing sector and industrial chains enjoy global competitive advantages, yet many industries suffer from severe overcapacity while the needs of certain groups go unmet.
This is not a short-term fluctuation. It stems from a series of institutional and structural factors: a GDP-oriented mechanism of competition among local governments; the dominance of state-owned enterprises—with a high share of state capital—in foundational sectors and strategic industries; a macro policy orientation that stabilizes growth chiefly by driving investment, especially infrastructure investment; and a manufacturing-centered, export-oriented economy. Together these have produced a lopsided growth model characterized by high savings, high investment, and high exports—one that prioritizes production over consumption.
The initial condition of reform and opening up was a shortage economy. During the long period of insufficient supply, this growth model was well suited to circumstances and indeed advantageous. Even as China’s economy shifted from high-speed to medium-speed growth, and from supply constraints to demand constraints, the model could keep running—displaying strong inertia and resilience—so long as room for investment remained. But its effective operation has a boundary: the point at which investment can no longer be pushed further and turns negative. That point has now been reached.
II. Insufficient End Demand as the Direct Cause of Persistently Weak Prices and Slowing Growth
The relationship between this imbalance and economic growth can be analyzed using a framework of the “height” and “breadth” of growth. Height refers to the expansion of the growth possibility frontier supported by productivity gains, driven by technological innovation, improved management, institutional reform, and opening up. Breadth refers to the extent to which different segments of society—say, divided into ten income groups—generate effective demand for existing productive capacity. Height determines the growth rate that is attainable; breadth determines the growth rate actually achieved.
Strong supply raises the height of growth, while weak demand means the breadth of growth has not expanded commensurately. Gains in height cannot substitute for expansion in breadth—indeed, they may create problems on the breadth dimension, as when artificial intelligence eliminates existing jobs and widens income disparities. This explains a common puzzle: why growth remains under heavy pressure even though innovation-driven development and new industries appear to be doing well.
Here it is necessary to introduce the concept of end demand. End demand refers to the portion of GDP that does not re-enter the next production process. It comprises all consumption plus non-productive—or consumption-oriented—investment, chiefly investment related to people’s livelihoods in real estate, infrastructure, and other services. Viewed from the natural flow of all economic activity, end demand constitutes final products in the true sense: the purposive portion of GDP devoted directly to meeting people’s aspirations for a better life. GDP minus end demand equals productive investment plus net exports—both of which are instrumental, existing to serve the growth of end demand.
For a long time, China’s consumption share of GDP has been roughly 20 percentage points below the international average—a structural deviation. But because real estate and infrastructure grew rapidly for an extended period, this deviation was effectively masked. After 2022, as real estate slumped sharply and infrastructure investment decelerated, the long-hidden structural shortfall in consumption was laid bare, becoming the choke point within end demand.
In recent years, the growth of end demand has slowed markedly and contracted in relative terms, dragging down the GDP deflator and pushing nominal growth below real growth. Combined with excessive investment—especially productive investment—this has driven capacity utilization down. When capacity utilization is too low, returns on investment are correspondingly poor, and investors become unwilling to invest more. This is the main reason for the current slide in investment.
Growth in industrial value added has held up reasonably well, driven mainly by exports and, more recently, by rising capital expenditure on artificial intelligence. But in the system of national accounts, net exports count as savings and correspondingly reduce domestic consumption. Strong exports are thus one cause of weak domestic consumption—a linkage that has not received the attention it deserves.
III. Making the Savings–Consumption Formation Mechanism the Focus and Point of Breakthrough
Behind “strong supply, weak demand” lies a national income structure of high savings and low consumption. By global standards, China’s savings rate is conspicuously high. Over the past decade or so it peaked above 50%, and though it has edged down in recent years, it remains above 42%. By contrast, the global average savings rate is roughly 25%. In terms of composition, China’s savings come mainly from the corporate and household sectors; government savings have gradually declined and have turned negative in recent years.
Take 2022 as an example. China’s flow-of-funds accounts show that GDP that year was roughly RMB 120 trillion, with total savings of RMB 55 trillion—a savings rate of 46% and a corresponding consumption rate of about 54%. Corporate savings amounted to RMB 27 trillion and household savings to RMB 27.6 trillion, roughly half each.
Corporate savings reached 22.5% of GDP—markedly high by international comparison. This is directly related to the low share of dividends in corporate capital returns. In 2022, only 10.2% of Chinese households’ property income came from corporate dividends, well below the global average of 55.7%. Historically, during the high-growth era, investment funding needs were enormous while external financing was scarce and costly, so firms leaned toward self-financing and retained more earnings. More importantly, state capital accounts for a large share of total corporate capital, and state-owned enterprises long paid little or nothing in dividends. The state capital operating budget system introduced in 2007 changed this somewhat. As SOE reform has deepened and the governance of state capital has improved, dividend payouts by state capital in listed companies have increased, but a large number of unlisted SOEs still pay little. With corporate income taking an outsized share of society’s total disposable income and being converted into corporate savings, the economy-wide corporate savings rate has ended up high. And corporate savings have only one use: investment.
Household savings are also elevated, but looking inside the household sector—ranking households by income from high to low—one finds that it is chiefly the massive savings of high-income groups that push up the overall household savings rate. China Merchants Bank’s 2024 annual report shows that its “Sunflower” clients (those with average daily assets of RMB 500,000 or more) accounted for just 2.49% of its retail customers yet held 81.90% of assets; compared with 2023, new assets from Sunflower clients made up 87.48% of all newly added assets. This indicates that a small number of high-net-worth clients hold the overwhelming majority of the bank’s savings assets, with concentration still rising. Data from other banks show similar patterns. Some argue that since China adds well over RMB 10 trillion in new savings each year, it would suffice simply to guide households to convert these savings into consumption. This view—focused on aggregates while ignoring structure, and blind to the direct link between high savings, low consumption, and excessive income disparities within the household sector—is deeply misleading both in theory and for policy.
IV. How to Advance Reform of the Savings–Consumption Formation Mechanism and Adjust Policy
Investment has now been contracting for more than a year, and in May this was compounded by negative growth in retail sales of consumer goods—something unseen since reform and opening up began, and which should command the highest attention. China’s economy once again stands at a critical turning point. The urgent task is to restore investment vitality and return investment to positive growth. The way to do so is to substantially lower the savings rate and correspondingly increase end demand. This differs from what some believe, and it is the key to understanding how China’s economy operates at the current stage.
National income divides into savings and consumption. If high savings do not come down, low consumption cannot go up—a simple, hard constraint. Only by lowering the savings rate and increasing end demand can capacity utilization be raised; and once utilization reaches a relatively high level, genuine demand for investment will emerge—precisely the “investment backed by demand and returns” that the central authorities have repeatedly emphasized. If instead the savings rate is not lowered, end demand is not increased (or is in effect reduced), and investment is forced up by the old methods, the supply–demand imbalance will only intensify, steering China’s economy in an altogether different direction.
The point of breakthrough for correcting the imbalance lies in reforming the savings–consumption formation mechanism and converting excess savings into effective consumption. Several priority areas of reform, with corresponding quantitative policy targets, can be proposed.
First, within a fairly short period—say three years—bring the economy-wide savings rate below 40% and the corporate savings rate below 20%, converting part of corporate savings into consumption and raising the economy-wide consumption rate above 60%. This would also be a concrete step toward implementing the 15th Five-Year Plan’s goal of raising the household consumption rate. The direct route is to raise corporate dividend payout ratios; transferring a sizable share of state capital to the social security fund is, in effect, one concrete form of state-capital dividend distribution.
Some harbor doubts about how state capital could be transferred: not much state capital is genuinely profitable and able to pay dividends; in some sectors state capital carries heavy debt burdens, making net assets hard to pin down; state capital falls under different departments and agencies, so transfers to the social security fund would meet resistance; and so on.
These problems are in fact not hard to solve. Simply put, the transfers can be made from state capital that is already listed. The A-share market is currently worth roughly RMB 120 trillion, of which state capital is preliminarily estimated at around 40%. A certain amount—say RMB 20 trillion—could be transferred from this into the social security fund. The transferred state capital would not change its departmental or institutional affiliation; instead, new pension funds would be established under the existing departments and agencies to manage the transferred capital, with new operating functions and objectives. From the capital market’s perspective, this merely converts a portion of state capital into pension assets, adding more long-term, patient capital.
Private enterprises should also be encouraged to raise dividend payouts. Through improved corporate governance, stronger protection of minority investors’ rights, and the promotion of long-term value investing, firms should be encouraged to return more profits to shareholders as dividends, which shareholders can then convert into consumption spending.
Second, steadily advance tax reform to curb the rise of the Gini coefficient and gradually bring it down to 0.4 or below, thereby raising society’s average propensity to consume and lowering the household savings rate.
International experience shows that economies that successfully moved from middle-income to high-income status mostly had Gini coefficients between 0.3 and 0.4, some even lower. A more balanced income distribution channels more national income into end-demand spending, easing the pressure of releasing the large capacity built up during the high-growth era.
China’s current tax structure is dominated by indirect taxes, with direct taxes such as personal income tax and property taxes accounting for a low share. From the standpoint of reforming the savings–consumption mechanism, reasonable taxation of high-income groups should be increased—focusing on personal income and property taxes—thereby raising government revenue. Some worry that this would damage the confidence and expectations of high earners. In reality, the negative effects would be limited; if anything, it would strengthen the government’s incentive to protect property rights. As one formulation puts it, the boundary of the capacity to tax determines the boundary of property-rights protection—because protecting property rights means protecting the tax base.
Third, shift the center of gravity of macroeconomic management and government functions at all levels from the supply side to the consumption side. More than 50% of macro stimulus spending should be devoted to addressing the supply–demand imbalance, with the emphasis on building the social security system for low- and middle-income groups.
There is some public confusion about how consumption drives growth. Reforming the savings–consumption mechanism and raising the incomes and consumption of low- and middle-income groups would, first, create new consumer market space, turning excess capacity into adequate—perhaps even insufficient—capacity, and thereby spurring new, effective investment. Second, and more importantly, expanding consumption enables more people, especially low- and middle-income groups, to share in the fruits of reform, opening up, and development, deepening their sense of gain as their aspirations for a better life are met. Equally important, expanding this group’s consumption—above all developmental consumption—is in essence investment in human capital, a concrete embodiment of “investing in people,” providing the human-capital foundation most vital to innovation-driven growth.
In raising the incomes and consumption of low- and middle-income groups, subsidies for goods purchases can accomplish only so much. The focus should be on two glaring shortfalls: housing and social security.
A migrant worker may own a 200-square-meter two-story house in the countryside, yet return there only a few days a year, spending the rest of the time crammed into a 10-square-meter basement room in the city. Statistically, his available housing space totals 210 square meters, but his actual housing conditions are dire. Migrant workers and similar groups face an enormous structural mismatch in housing between urban and rural areas. Housing-security policies and the reallocation of urban–rural resources should be used to accelerate solutions to the housing difficulties of migrant workers and other new urban residents—which would also supply genuine demand to help the real estate sector stabilize and return to normal growth.
Through the transfer of state capital to social security, fiscal subsidies, short-term stimulus funding, and improvements to social insurance contributions, the aim during the 15th Five-Year Plan period should be a marked increase in per capita pension income under the basic pension scheme for urban and rural residents—the scheme covering the largest number of low- and middle-income people—commensurate with the current imperative of boosting end demand and stabilizing macroeconomic growth. Among the many consumption-stimulus measures now on the table, this reform ranks among the most effective for driving growth and plays an irreplaceable role in stabilizing it.
Some contend that raising pension incomes for rural elderly people would do little to expand consumption. This is a specious argument. In fact, the excessively low pension incomes of those covered by the urban–rural residents’ pension scheme suppress society’s consumption potential in multiple ways. First, they directly constrain the spending power of 170 million pension recipients. Second, inadequate pensions for rural parents force their children to provide larger intergenerational transfers, crowding out the children’s own consumption. Third, they weaken the future expectations of the 370 million people currently contributing, pushing them into higher precautionary savings. The urban–rural residents’ pension scheme covers 550 million people—95% of them rural residents—accounting for roughly half of all pension participants nationwide. It is the segment of China’s pension system with the lowest incomes, the largest scale, and the highest propensity to consume. Seen in this light, the pension shortfall for this population constrains the consumption growth of roughly half of China’s people, with economy-wide implications that cannot be ignored.
V. Clarifying Some Misconceptions About Reversing the Imbalance
One view holds that the production-first, consumption-second growth model has existed for a long time—we have long spoken of it as unbalanced, uncoordinated, and unsustainable, yet we got through all those years, so perhaps it can continue. But in the past we were long in a shortage economy, and even after entering the demand-constrained stage there was still room for investment. Those conditions no longer exist. Investment has been contracting for an extended period—evidence that sustaining this growth model is becoming ever more difficult.
Another view holds that expanding consumption and raising the incomes of low- and middle-income groups is a livelihood issue that should proceed within our means and without haste. For a long time this view had some merit. But the situation today is that without raising these groups’ incomes and expanding end demand, capacity utilization cannot improve, investment cannot resume growth, and actual growth will fall well below potential. Raising the incomes and consumption of low- and middle-income groups is a livelihood issue, yes—but even more, it is an urgent matter of macroeconomic stabilization. In the past, when growth flagged, we reached for investment; at the current stage, we must reach for consumption. The logic is the same; only the times have changed, and with them the areas holding growth potential.
Still another view holds that while structural and institutional reforms matter, they are distant water that cannot quench present thirst, so the short run must rely on macro stimulus. In fact, structural reform and macro policy each have their functions; they are not an either/or choice, and combining them often works better. Some structural reforms—such as the transfer of state capital to social security described above—can deliver results in the short term. Others, such as reducing the Gini coefficient, may look slow in the short run once targets are set and action begins, but prove fast in the long run. Substituting short-term stimulus for structural reforms that could actually be advanced—or using it to avoid them—will only prolong the problems and raise their cost. Japan was the first country to propose and implement quantitative easing and zero or negative interest rates. More than twenty years on, it offers no record of decisively escaping deflation or restoring growth vitality. Many in recent years have studied Japan’s experience; China should draw lessons from it rather than repeat its mistakes.
On reversing the imbalance between strong supply and weak demand, the central leadership’s judgment is clear, and the path to a solution is equally clear. International experience shows that economies caught in the “middle-income trap” mostly suffered from weak innovation and uncompetitive industries; China’s shortcoming today, by contrast, is “strong supply, weak demand.” Logically, demand-side problems are relatively easier to solve than supply-side ones—but they are not without difficulty. The imbalance is deeply bound up with a web of institutional and structural factors. Breaking out of the old growth framework—shifting from growth driven mainly by investment and exports to growth driven mainly by innovation and consumption, and swiftly establishing a new growth framework—will require a new round of intellectual emancipation and a new social consensus. It means casting off path dependence and confronting and resolving the necessary transformations in thinking, interest relationships, policy instruments, and working methods, so that strong supply propels strong demand, a new cycle of dynamic mutual reinforcement between supply and demand takes shape, the macroeconomic fundamentals are stabilized, and sustained momentum is secured for long-term, stable growth.
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Thanks for sharing.
The diagnostic frame is fundamentally neoclassical. An alternative diagnostics makes more sense, and results in different sets of responses or prognosis.
Savings are a residual, not a constraint. They are dormant money reserves not in circulation, no doubt (I am sure we agree on this narrow point), but the channels through which they will come into circulation aren’t properly understood let alone resolved with “aggregate investment-consumption” frames.
For starters, it’s important to understand the origin and nature of savings themselves. As residuals they are what’s left after income is received and some spent on expenses. This income derived from funds mobilised to activate the production process; these funds are investments. The rate of investment drives the rate of savings via income. Hyper competitive markets in conditions of production abundance in fundamental goods of necessity mean expenses as a % of income are relatively modest.
The second thing to understand is that what we are witnessing is actually qualitative change in both the composition of production and in consumption. China is experiencing the playing out of Engel’s Law, and has been - and continues to - upgrade its production system overall. Boosting services is the key consumption activation mechanism, in these conditions.
The third thing to be reminded of is that many services are provided as low cost public goods. Take healthcare and education, or even transport, as cases in point. Same for electricity and data. All very low cost. Boosting consumption spend by raising prices does not boost living standards.
The fourth thing to note is that investment itself will take on new priorities. The push for upgraded urban renewal is an interesting and important dimension of this. It cuts across quality of life issues of course, as well as the reality that old infrastructure needs to be replaced or overhauled. Much that was built in the 1970s-1990s period in particular will be open for either major renovation or replacement.
That said, I do agree that rural and lower income persons and households should continue to experience above average real wages growth. Income elasticity of expenditure would suggest this will see rising consumption down as this continues to take place.
As for dormant household savings, these will also be brought into circulation via financial products and capital markets development. So much is clear when one reads the recent remarks from Pan Gongsheng at the PBOC.
Tax reform isn’t about financing government, which is self-financing. It is about behavioural signals; that’s how it should be treated.
In sum, talk of aggregate consumption misunderstands the dynamics of structural change in the composition of production systems and in the composition of consumption. As such, policy should not be framed by these levels of aggregation but instead need to focus more on the interaction between circuit of liquidity flow through systems of diverse compositions noting that dynamic re-proportioning in this multi-dimensional environment demands more than a one dimensional “savings-investment-consumption” frame.