Sheng Songcheng: High-quality economic development requires a good balance between consumption and investment

The 20th Central Committee's Fourth Plenary Session of the Communist Party reviewed and approved the "14th Five-Year Plan" proposal. The "14th Five-Year Plan," as a five-year plan bridging the achievement of the second centenary goal by 2035, is of paramount importance. The communiqué describes the "14th Five-Year Plan" period's key role in basically achieving socialist modernization as "consolidating the foundation and making comprehensive efforts," emphasizing both "qualitative effective improvement" and "quantitative reasonable growth." It is evident that while pursuing high-quality economic development, the country also has certain requirements for economic growth, needing to maintain an average annual growth rate of over 4.5% in the next decade. This is a simple calculation based on the goal that by 2035, China's per capita GDP should reach the level of moderately developed countries (per capita GDP exceeding $20,000). Our "two-step" goal is clear: from 2020 to 2035, basically achieve socialist modernization; from 2035 to the middle of this century, build China into a prosperous, democratic, civilized, harmonious, and beautiful socialist modern power.

I. Innovation-Driven High-Quality Economic Development

The communiqué places "building a modern industrial system, consolidating and strengthening the foundation of the real economy" and "accelerating high-level technological self-reliance and self-improvement, leading the development of new quality productivity" in the most prominent position, indicating that China's innovation-driven development strategy has entered a deepening stage.

One approach to promote the deep integration of technological innovation and industrial innovation is to develop productive services well. In 2024, I published an article in the theoretical section of the Wenhui Daily titled "How Productive Services Empower New Quality Productivity." In this study, we found that the proportion of productive services in China's GDP has just exceeded 30%, showing a significant gap compared to the United States, especially in high value-added industries (such as R&D, information technology services, business services, etc.). Although the manufacturing sector in the U.S. has a low share (only about 10%), its productive services account for a high proportion (47.5% of U.S. GDP), making it the "mainstay" of U.S. services. A high proportion of productive services greatly helps and promotes manufacturing. In the context of the development of the digital economy and the accelerated integration of manufacturing and services, high-end manufacturing must be supported by advanced services. The Fourth Plenary Session communiqué clearly states the need to "maintain a reasonable proportion of manufacturing, build a modern industrial system with advanced manufacturing as the backbone," and "promote high-quality and efficient development of the service industry," which points the way for the service industry to support the development of new quality productivity.

II. Comprehensive Expansion of Domestic Demand Should Focus on the Positive Cycle of Consumption and Investment

As early as the Central Political Bureau meeting and the Central Economic Work Conference held in December 2024, as well as in this year's government work report, the primary task proposed was to "vigorously boost consumption, improve investment efficiency, and comprehensively expand domestic demand." "The focus of economic policy has shifted more towards benefiting people's livelihoods and promoting consumption, using consumption to stimulate and smooth economic circulation, and leading industrial upgrades through consumption upgrades" (for example, 5G and new energy vehicles, etc.). I believe this marks a significant shift in China's macroeconomic policy and is of milestone significance. Traditional excessive investment expansion is a major issue currently facing China's economy. In the third quarter of this year, China's capacity utilization rate was 74.6%, below the normal level (the average capacity utilization rate in China from 2006 to 2019 was around 77%) Therefore, it is very important to properly handle the relationship between consumption and investment.

At the beginning of 2023, I published an article calling for "consumption and investment are not mutually exclusive" (see "Consumption and Investment Are Not Mutually Exclusive," Shanghai Securities Journal, 2023-02-19). Boosting consumption can not only increase total demand and drive economic growth but also give rise to new, rich, and high-level consumption demands, promoting high-quality and efficient investment. It should be recognized that there is only ineffective investment, not ineffective consumption. There should be a more balanced and positive interaction between consumption and investment in our country.

The Fourth Plenary Session also clearly proposed such requirements, for example, "Adhere to the strategic basis of expanding domestic demand, insist on benefiting people's livelihoods and promoting consumption, closely combine investment in goods and investment in people (the country has already promoted and deployed in this regard, such as childcare subsidies, tuition reductions for preschool education, etc., and now encourages diversified talent development, not only cultivating college students but also increasing the training of skilled personnel), lead new supply with new demand, create new demand with new supply, promote the positive interaction between consumption and investment, supply and demand, and enhance the endogenous power and reliability of the domestic big cycle," and "vigorously boost consumption and expand effective investment" (previously it was "vigorously boost consumption, improve investment efficiency, and comprehensively expand domestic demand").

Regarding boosting consumption, I would like to add one point, which is to enhance the enthusiasm of local governments to promote consumption through tax reform. For example, optimizing the value-added tax distribution mechanism, focusing on more accurately implementing compensation for the place of consumption (currently, our country's value-added tax distribution follows the "production place principle").

III. The Internationalization of the Renminbi and Exchange Rate Policy Should Adapt to the Actual Needs of the New Situation

The communiqué proposed "expand high-level opening up and create a new situation of win-win cooperation." Since the introduction of the "Free Trade Zone Strategy" and the "Belt and Road" initiative in 2013, our country has begun to enter a "dual investment" stage that emphasizes both "bringing in" and "going out," with foreign direct investment (FDI) flow ranking among the top three globally. In 2015, our foreign direct investment (ODI) flow first exceeded the scale of foreign capital inflow (FDI). At the same time, our trade partners are becoming increasingly diversified, and the overall trade concentration is on a downward trend, with the proportion of exports to the top three trading partners (ASEAN, EU, and the United States) dropping from 50.8% in 2019 to 45.5% in 2024, while the export share to "Belt and Road" countries has accelerated to 47%. The trade surplus from the United States as a proportion of our goods trade surplus has continuously declined from 92.1% in 2018 to 36.4% in 2024, the lowest point in the past decade. These changes mean that a stable and rising Renminbi exchange rate in the medium to long term will generally be more favorable for our dual opening up and foreign trade relations.

Enterprises conducting international settlements in Renminbi can effectively avoid exchange rate fluctuation risks. Currently, the proportion of cross-border settlements in Renminbi in our goods trade has reached 30%, with some regions (such as Guangdong) exceeding 50% I have another suggestion, which is to consider the renminbi as a quasi-safe-haven currency to promote its internationalization. The renminbi already possesses some attributes of a safe-haven currency, with considerable advantages in institutional credibility (government and central bank commitments to stability) and macroeconomic stability (low inflation, trade surplus, and substantial foreign reserves).

If the renminbi becomes a "quasi-safe-haven" currency, it can enhance its weight in global investment portfolios, reduce the volatility brought by short-term capital "in and out" flows, alleviate the current pressure of capital outflow under low interest rate levels, and provide greater operational space for monetary policy.

In summary, my prominent understanding of the spirit of the Fourth Plenary Session of the Party is that the session emphasized new requirements for high-quality economic development, where qualitative effective improvement and reasonable quantitative growth complement each other, placing "economic construction at the center" in a prominent position, and comprehensively expanding domestic demand and the construction of a unified large market for in-depth development. This meeting also placed great importance on people's livelihoods and comprehensive human development, as well as achieving common prosperity.

(Author: Sheng Songcheng, Professor at Shanghai University of Finance and Economics and Professor of Economics and Finance at China Europe International Business School. This article is based on Professor Sheng Songcheng's speech at the "Study and Implement the Spirit of the 20th Party Congress Fourth Plenary Session and '14th Five-Year Plan' Outlook Expert Seminar" hosted by the China-style Modernization Research Institute at Shanghai University of Finance and Economics on October 25, 2025. This article reflects the author's views and does not represent the opinions of the institution he works for.)

Author of this article: Sheng Songcheng, Source: China-style Modernization Research Institute, Original title: "Focusing on the Fourth Plenary Session | Sheng Songcheng: High-quality Economic Development Requires a Balance Between Consumption and Investment."

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