Boosting demand a key task for policymakers

China is doubling down on shoring up domestic consumption to prop up economic growth, especially in the face of a challenging external environment that weighs on the country's foreign trade, analysts said.

After the Government Work Report listed boosting domestic demand as a top priority in March, a tone-setting meeting convened by China's top leadership in late April reiterated the imperative to strengthen the role of consumption in driving economic growth.

The April meeting held by the Political Bureau of the Communist Party of China Central Committee urged "preparing for worst-case scenarios with sufficient planning", as the country faces increasing impacts from external shocks.

"Faced with Washington's erratic tariff policy, the best strategy for Beijing is to stay focused on its own development agenda," said Luo Zhiheng, chief economist at Yuekai Securities. "Revitalizing consumption is a must."

While in the first quarter, consumption contributed 51.7 percent to the country's economic growth, analysts suggest that there is still significant room for further improvement when compared to the consumption-driven models of developed economies.

The lack of a robust social safety net, uneven access to public services, and supply-side inefficiencies have dampened the consumption enthusiasm of Chinese households, said Luo.

To address these bottlenecks, the country unveiled a dedicated plan to boost consumption in March, with concerted efforts channeled toward increasing people's spending power by raising earnings and reducing financial burdens, as well as generating effective demand through high-quality supply.

Policymakers have placed a high premium on stabilizing the housing and capital markets this year, which is aimed at bolstering the wealth effect and stimulating consumption, said Song Xuetao, chief economist at Sinolink Securities.

Song also noted that the parallel efforts to strengthen social safety nets in areas such as pensions, housing, healthcare and education are crucial in reducing financial burdens on consumers.

"This dual approach of increasing incomes and reducing household expenditures will empower consumers and unlock their latent spending potential, transforming consumption into a more reliable and resilient driver of economic growth," Song said.

Enhancing the quality of consumer supply is also a key factor in unlocking the full potential of domestic consumption, analysts said, highlighting the role of service consumption.

Global consultancy McKinsey &Company said in a report earlier this month that after several challenging years that have dampened their confidence and willingness to spend, Chinese consumers are starting to move past this phase and are adjusting their shopping behavior.

"Consumers are shifting their spending toward products and services that help them achieve personal fulfillment," McKinsey said.

Commerce Minister Wang Wentao said that the international experience suggests that when a country's per capita GDP reaches around $15,000, its consumption structure tends to shift rapidly from being predominantly goods-based to being more service-oriented.

With China's per capita GDP already exceeding $13,000, the country's consumption landscape is entering a phase of accelerated transition toward service consumption, Wang added.

In the first quarter of this year, retail sales of services grew by 5 percent year-on-year, outpacing the growth rate of goods retail by 0.4 percentage points, data from the National Bureau of Statistics showed.

The five-day May Day holiday period saw 314 million domestic tourist trips across China, an increase of 6.4 percent compared to the same period last year. Domestic tourists spent 180.27 billion yuan ($25 billion) during the holiday, up 8 percent year-on-year, according to the Ministry of Culture and Tourism.

China has allocated 300 billion yuan to support trade-ins of consumer goods this year, and policymakers could consider extending the program to cover the service sector, Song said.

China's central bank announced in May that it has set up a relending facility of 500 billion yuan for service consumption and elderly care, aiming to guide financial institutions in strengthening support for these sectors.