Cai Fang, a member of the Chinese Academy of Social Sciences, recently published a major article in the Study Times on August 10, 2026, titled "Work Together to Break the Contradiction of Strong Supply and Weak Demand." The article, reprinted by People's Daily Online, arrives at a key moment when mid-year economic data has been released and the "15th Five-Year Plan" is being drafted. Its timing carries significant implications for policy direction.
Cai Fang, a top scholar in population, employment, and income distribution, argues that China's economy does not face a cyclical problem. Instead, the real constraint lies on the demand side, specifically the low household consumption rate. He suggests that the solution is not simply handing out money, but "investing in people" by creating a long-term mechanism that integrates employment expansion, income growth, and stable expectations, ensuring the benefits of technological progress and artificial intelligence are shared equally by all citizens.
The core of the argument is that while businesses will inevitably face competitive elimination, workers should not be the losers in this process. The household consumption rate will not automatically rise as the contribution of exports and investment declines; it must be cultivated as a capability through substantial investment. The three pillars of expanding employment, increasing income, and stabilizing expectations form the foundation and long-term mechanism for boosting household consumption.
Supply Side: Operating Within a Reasonable Range
China's economy is in a stable, virtuous cycle, transitioning towards new growth drivers. GDP grew by 5.0% in the first quarter of 2026 and 4.7% in the first half, comfortably within the government's target range of 4.5% to 5.0%. This growth rate aligns with the potential growth rate required to meet the goal of becoming a medium-developed country by 2035, which demands an average annual GDP growth of 4.17% during the "15th Five-Year Plan" and "16th Five-Year Plan" periods. The current speed is sufficient to ensure these targets are met.
A new wave of technological revolution, led by artificial intelligence, is expected to drive further total factor productivity growth. According to the National Bureau of Statistics, new growth drivers—including high-end manufacturing, the digital economy, and modern services—contributed over 40% to economic growth in the first half of 2026. The labor market is also on a normal track, with the average urban surveyed unemployment rate at 5.2%, consistent with the estimated natural rate of unemployment, reflecting only structural mismatches rather than cyclical unemployment.
Demand Side: A New Balance Among the "Three Carriages"
The constraints on China's economic growth are gradually shifting to the demand side, where a new balance among the "three carriages" of net exports, investment, and consumption is forming. Exports and imports were both strong in the first half of 2026, though the global economy is weakening due to geopolitical conflicts and trade friction. The IMF has downgraded its 2026 world growth forecast to 3.0%.
Investment is showing structural optimization, with strong growth in sectors like aerospace, electronic communication equipment, AI-related integrated circuits, and smart vehicle equipment. However, diminishing returns on capital are leading to weaker investment intentions, requiring more sustainable demand factors to be activated. Household consumption also shows structural adjustments, with growth in online retail, rural retail, and services. While the consumer price index is rising, signaling improved expectations, overall consumption growth, measured by total retail sales of consumer goods, is not yet strong enough to serve as the main demand-side driver of economic growth.
Addressing Old Problems and New Challenges
The economy is experiencing an accelerated transition of old and new growth drivers, leading to deeper structural employment challenges. The rapid breakthrough and widespread application of AI bring more severe "creative destruction" problems, requiring institutional arrangements to promote job creation and strengthen social security. The household consumption rate, which is influenced by long-term factors like the share of labor income, will not automatically improve as exports and investment contributions decline; it must be cultivated through substantial investment.
Investing in People to Resolve the Supply-Demand Imbalance
Resolving the pattern of strong supply and weak demand requires a combination of counter-cyclical macroeconomic policies and a comprehensive toolkit that integrates various policy instruments. Increasing the household consumption rate should focus on both consumption capacity and willingness. China's experience shows that increasing investment in people can significantly raise the consumption rate. From 2010 to 2025, the household consumption rate rose from 34.9% to 40.0%, while the share of GDP spent on labor compensation, social insurance, and social assistance increased from 52.6% to 61.2%.
The three-in-one approach of expanding employment, increasing income, and stabilizing expectations forms the foundation for expanding household consumption. Active employment policies need to be upgraded to stabilize job numbers and improve job quality. Increasing income and improving distribution are complementary, requiring both labor market compensation and redistribution to narrow income gaps. On the supply side, internet platforms and AI models should be used to provide high-quality products and services, transforming technological dividends into a vast consumer market. On the demand side, as incomes rise, demand should shift from ordinary goods to higher-quality goods, unlocking huge potential. With an aging population, new basic needs for the elderly and children will create structural opportunities for a super-large market. The key is to implement effective policies focused on "investing in people."