China should steer its next phase of economic development toward stronger domestic demand while pressing ahead with deeper income distribution reform and more decisive technological breakthroughs, as policymakers seek to rebalance growth drivers amid still-weak domestic demand and intensifying global competition, economists said.

The shift, they said, requires coordinated moves to raise household incomes and consumer confidence, expand high-quality services consumption and push China from a technology "follower" toward a "leader" in key strategic industries, laying the groundwork for more resilient, innovation-driven and consumption-led growth in the years ahead.

Yang Weimin, former deputy head of the Office of the Central Leading Group on Financial and Economic Affairs, said keeping economic growth within a reasonable range hinges on building a consumption-driven development model, with reform of the income distribution system at its core.

"China is facing a situation of strong supply and weak demand, and the focus should be on the demand side," Yang said at a meeting in Beijing on Wednesday.

While China should continue to play the role of the "world's factory" on the supply side, he said it must cultivate consumption as a stronger growth engine to form a new model that better aligns supply and demand.

Yang said a balance between total supply and total demand is a prerequisite for sustainable growth, but that distribution is the key link connecting the two.

"How much is distributed determines how much is consumed, and the main reason for weak household consumption now lies in distribution," he said, pointing to the low share of household income and wide income gaps.

Official data showed that household consumption accounted for nearly 40 percent of GDP in China in 2024, which is still far behind ratios in developed economies such as the United States and Japan.

Yang called for setting a clear target for household disposable income growth to outpace overall economic growth, lowering the share of government disposable income, maintaining a reasonable macro tax burden and reducing the income share of enterprises — particularly State-owned firms and the financial sector.

He also called for substantial increases in minimum wages, higher pay for ordinary workers, stronger redistribution to boost low-income groups and more concrete measures under urban-rural income growth plans, including raising the urbanization rate of migrant workers.

"The most direct factor constraining consumption is income," said Huang Hanquan, head of the Chinese Academy of Macroeconomic Research, adding that weak confidence, a still limited middle-income group and relatively low social security coverage also weigh on spending. On the supply side, he said, the largest gap lies in high-quality services, which remain insufficient.

Huang said that over the short term, the priority should be stabilizing expectations and incomes to support consumption, including advancing the urban-rural income growth plans, refining existing policies to better support services consumption and removing unreasonable restrictions that could quickly unlock demand.

In the medium term, he said China should address supply-side shortcomings by expanding high-quality goods and services, further opening the services sector to foreign investment and lowering barriers for private firms.

Over the longer term, Huang added that China needs to strengthen its underlying capacity by improving institutional arrangements and building an endogenous growth model led by domestic demand and consumption. This requires optimizing income distribution and improving social security systems — including pensions, healthcare and unemployment insurance — to reduce precautionary savings and encourage households to spend.

During the meeting, Wang Yiming, vice-chairman of the China Center for International Economic Exchanges, said high-quality development ultimately depends on science and technology, adding that China must accelerate high-level technological self-reliance during the upcoming 15th Five-Year Plan (2026-30) period.

"Only by strengthening original innovation and making breakthroughs in key core technologies can China enhance its initiative in international competition," Wang said.

According to the Recommendations of the Central Committee of the Communist Party of China for Formulating the 15th Five-Year Plan for National Economic and Social Development, over the next five years, China should enhance the overall performance of its innovation system, raise its innovation capacity across the board, achieve a leading position in scientific and technological development, and keep fostering new quality productive forces.

Wang called for a shift to decisive breakthroughs in core technologies, stronger long-term support for basic research, deeper integration between technological and industrial innovation, and a greater role for enterprises as the main drivers of innovation.

He also highlighted the importance of capital markets and modern finance, particularly as artificial intelligence fuels a new wave of technological and industrial transformation, making it necessary to build a financial system better aligned with innovation needs.

ouyangshijia@chinadaily.com.cn