(Yicai) Dec. 9 -- China must urgently build a comprehensive policy system to expand domestic demand, addressing external economic challenges and the diminishing returns of its traditional investment-driven growth model, according to the chief of a private think tank.

The primary challenge in China's economy is the significant suppression of consumption, Teng Tai, director of the Wanbo New Economic Research Institute, wrote in a recent article published on WeChat.

Evidently, household consumption represents only 37 to 39 percent of China's gross domestic product, and overall consumption accounts for about 55 percent, lagging over 20 percentage points behind the global average, he pointed out.

Meanwhile, the continuous expansion of inefficient investments not only undermines consumption but also risks trapping China in an "over-investment" cycle, Teng warned.

To address these challenges, China should transition from an investment-oriented fiscal policy to one that prioritizes people's well-being. This would involve reallocating funds from infrastructure construction to critical areas such as social security, healthcare, and other livelihood support mechanisms, while also providing targeted consumption subsidies for residents, the expert suggested.

Moreover, the country must move beyond traditional monetary policy thinking and embrace a more accommodative approach. China should stimulate the consumer market by providing liquidity support through strategic measures, including lowering real interest rates and innovating the monetary transmission mechanism—the process by which the central bank influences consumption and investment by manipulating interest rates, money supply, and credit conditions.

Finally, China must vigorously support private sector development. The private economy is crucial for the services sector, serving as the primary source of employment and income for residents, and playing a pivotal role in driving consumption growth, Teng emphasized.

Teng is not alone in recognizing the imperative for economic transformation. The Communist Party leadership has already signaled a shift, emphasizing at a July meeting the need to "expand domestic demand with emphasis on boosting consumption" and enhance the consumption capacity of middle and low-income groups.

Despite challenges, China can unlock new economic growth potential by implementing targeted fiscal and monetary policies, promoting reforms to increase residents' incomes, and unleashing the consumption potential of the nation's population of 1.4 billion people, Teng said.

Developing a consumption-driven society will not only address cyclical economic issues but also strengthen China's international competitiveness in the emerging global economic landscape, he concluded.

Editor: Emmi Laine