Editor's note: Cai Fang is the chairman of China Finance 40 Forum Academy Committee (CF40). The article reflects the author's opinions and not necessarily the views of CGTN. It has been translated from Chinese and edited for brevity and clarity.

In the years before the pandemic, China had been gradually transforming its economic development, shifting to a consumption-driven model. Household consumption accounted for 70 percent of final consumption expenditure, and consumption contributed 62 percent to GDP growth on average. The impact of the pandemic over the past three years has hindered this transformation. During the pandemic, a large proportion of the workforce was in cyclical unemployment for long periods of time, which affected the normal growth of household incomes. Loss of income will inevitably have a negative impact on consumption. If household budgets cannot recover, it will inevitably create a demand constraint on economic recovery.

Pressure on household budgets

Consumption behavior is influenced by many factors such as employment, income, savings, social security, prices of consumer goods and services, and market accessibility. The pandemic has caused a deviation from the norm, and has had an adverse effect on consumption.

Since the pandemic, the damage to household budgets in China has manifested itself in three ways: First, cyclical unemployment in the past three years has led to a slowdown in income growth; Second, sustained unemployment and insufficient employment have led to an imbalance in already tight household budgets; Third, there is a trend of weakening consumer expectations.

If household budgets do not recover, the lack of consumer confidence may shift from short-term to long-term behavior.

The new normal for China's economy

Following the pandemic, the Chinese economy has entered a new phase. But this may be the result of changes brought about by the development of the economy and population, rather than as a result of the pandemic.

Firstly, demand-side factors, especially consumption, have become a normalized constraint on economic growth. Secondly, China's natural unemployment rate may be higher. Finally, people's behavior has changed.

Stimulating consumption to expand domestic demand

To address these changes, macroeconomic policies also need to change, employing new ideas and new methods.

Overall, the most urgent goal is to stimulate consumption. And to achieve this it is necessary for macroeconomic policies to have new targets, new means, and new goals to shift the target of stimulus from investment to consumption.

Reforming the registered residence system, particularly the settlement of migrant workers, is usually seen as a long-term task, but, if it carried out quickly it could produce an immediate stimulus effect.

In addition, an overhaul of social insurance and other public services related to aging could significantly improve the level of protection. As negative population growth comes into effect, the proportion of the elderly population to the working age population will increase at an unprecedented rate from 2022 to 2035. This will make it harder to ensure the sustainability of the "pay as you go" social security system, as well as ability to provide adequate elderly care and medical care.

We face a window of opportunity to combine long-term institutional development goals with short-term economic stimulus effects, and use reform dividends to promote economic recovery and social welfare system reform.