Service consumption and 'investing in people' key drivers of domestic demand expansion

Editor's note: Guo Chunli is vice president and researcher at the China Academy of Macroeconomic Research. Jiang Xue is deputy director and associate researcher at the Income Distribution and Consumption Research Office of the Institute of Economic Research at the China Academy of Macroeconomic Research. The article reflects the authors' opinions and not necessarily the views of CGTN. It has been translated from Chinese for brevity and clarity.

International experience has shown that when a country's per capita GDP surpasses $10,000, the growth of the share of service consumption will accelerate, and once it reaches $15,000, service consumption will begin to dominate household consumption. 

Currently, China's per capita GDP has exceeded $13,000, with service consumption accounting for 46.1 percent of household consumption expenditure, which is about 10 percentage points lower than the average at comparable stages of development in the US, Japan, and South Korea. China is now at a critical juncture transitioning from a goods-dominated consumption model to one that places equal emphasis on goods and service consumption. 

In terms of structural layout, China's service consumption is still concentrated in traditional sectors such as hospitality, catering, and domestic services, with significant room for development in mid-to-high-end services like healthcare, wellness, and customized consumption. In addition, cultural and tourism-related consumption has yet to shift from the ticket sales economy to an integrated cultural and tourism consumption economy. In 2023, China's trade deficit of travel services reached $181.7 billion, indicating substantial untapped potential to attract both domestic and international consumers. These factors suggest that there is considerable room for both quantitative expansion and structural upgrading in China's service consumption.

The concept of "investing in people" is the specific manifestation of the people-centered philosophy of development, stressing the need to direct funds and resources toward key livelihood areas such as education, healthcare, employment, and social security and addressing the needs of all demographic groups across all life stages. This approach will foster a favorable cycle between economic growth and improved livelihoods. 

More than just a livelihood-related policy, "investing in people" is a strategic choice for economic transformation. At its core, it seeks to enhance household consumption capacity and confidence through improvements in human capital and optimization of public services, alleviating concerns that deter residents from spending and unlocking consumption potential. We have now entered a crucial phase where investment in people and investment in materials must proceed in tandem, which will solidify the material foundation of economic development while enhancing the resilience of development through human capital accumulation, thereby injecting lasting momentum into Chinese modernization.

In the future, service consumption and "investing in people" will become key to expanding domestic demand. A close integration of these two priorities can enhance consumption capacity by ensuring people's livelihood while stimulating demand potential and effectively addressing inadequate domestic demand through supply-side innovation. This strategy is not only expected to fuel short-term economic recovery but also lay the groundwork for long-term and high-quality development. This will require stronger policy coordination, targeted solutions to pressing livelihood challenges, and the expansion of domestic demand and improvement of people's well-being as dual drivers.

Firstly, it is imperative to strengthen investment in human capital and boost consumption resilience. Education system reform and skills training should be strengthened, with a focus on expanding access to basic education and advancing vocational education reform. Meanwhile, efforts should be made to ensure equitable, high-quality development of compulsory education while increasing the availability of high school opportunities and higher education degrees. Free preschool education should also be gradually promoted. In addition, industry-education integration should be deepened, encouraging polytechnic colleges to collaborate with private enterprises on customized skills training programs to mitigate the impact of artificial intelligence on traditional jobs. A lifelong learning system should be established, and digital skills training programs should be promoted. By expanding access to skills training through online education platforms, workforce qualifications can be improved, and reemployment opportunities for job seekers can be enhanced. These efforts will help streamline the "employment-income-consumption" cycle and reinforce consumption resilience.

Secondly, mechanisms to ensure people's livelihood must be improved to strengthen consumption capacity. Public services should be optimized, and the costs of childbirth, education, and healthcare should be reduced, thereby alleviating the burden of essential consumption on residents and augmenting their purchasing power. This will help unlock consumption potential. Maternity insurance coverage should be further expanded, while region-specific childcare subsidy programs should be introduced. The capabilities of grassroots healthcare institutions must be enhanced to improve access to medical resources at the grassroots level. The minimum standard for basic pension programs for rural and urban residents should be gradually raised, while the supply of inclusive elderly care services should be expanded. Additionally, the childcare service system should be refined to alleviate families' parental concerns. Furthermore, programs to protect the rights of people doing flexible jobs should be implemented, extending the coverage of unemployment insurance and stabilizing the income expectations of these groups.

Thirdly, efforts should be expedited to expand service consumption and boost consumers' willingness to consume. Priority should be given to upgrading services for both the elderly and young children by developing community-based integrated childcare and early education services. The supply of inclusive elderly care and childcare services should be expanded, alongside improvements in service quality, to unlock the potential of the silver economy and parent-child consumption. We should promote deeper integration of culture, sports, tourism, and commerce to extend the industry chain of cultural, sports, and tourism-related consumption, thereby stimulating diverse and multi-tiered cultural and tourism demand. Concurrently, pilot programs for opening the services sector should be advanced in an orderly manner, expanding market access in fields like healthcare, education, and telecommunications. Furthermore, high-quality international consumer service providers should also be introduced to elevate the overall quality of service consumption.