Yu Yongding on the Economic Priorities of the 15th Five-Year Plan

Senior economist argues against growth range target, advises that China should lean on investment and macroeconomic expansion, with a stronger focus on industrial and economic security.

In this latest discussion of the 15th Five-Year Plan, Yu Yongding, one of the most influential economists in China, argues that the country should treat development and security as equally central in a far harsher external environment; set a specific GDP growth target rather than a vague range; avoid treating total factor productivity as a rigid policy goal; reject the idea that consumption, in itself, drives long-term growth; and rely more heavily on infrastructure investment to both support short-term demand and strengthen long-term potential.

He also argues that resolving overcapacity is not a macroeconomic policy target, that China must preserve the breadth of its industrial system and full-chain independent control, and that stronger expansionary fiscal and monetary policies are needed to reduce external imbalances and stabilise growth.

For readers interested in Yu’s thinking on one of these points in greater depth, we recently published another article explaining his argument that “there is no consumption-driven growth model”.

—Yuxuan Jia

The following article was published on the official WeChat blog of Shanghai Development Research Foundation (SDRF) on 11 April 2026.

余永定：“十五五”期间的中国经济

Yu Yongding: China’s Economy During the “15th Five-Year Plan” Period

On 2 April, 2026, the Shanghai Development Research Foundation held its 200th academic salon. The featured speaker was Yu Yongding, Academician (学部委员) of the Chinese Academy of Social Sciences and the guest at the foundation’s very first salon. In this talk, Yu shared his reflections on the 15th Five-Year Plan and China’s economic trajectory, offering a systematic reading of the plan’s core priorities, clarifying key economic misunderstandings, and advancing a set of pragmatic policy proposals. Drawing on more than two decades of research, he examined the international environment, growth targets, consumption and investment, industrial-chain security, local government debt, and other major issues, providing a clear framework for understanding both the plan and the direction of the Chinese economy.

I. The “15th Five-Year Plan”: Assessments on the International Situation and the Positioning of Growth Targets

(1) Major assessments on the international situation

One of the most notable changes in the 15th Five-Year Plan is that the familiar language of “peace” and “development,” repeated for decades, is absent. That omission reflects the leadership’s grimmer assessment of today’s geopolitical environment. Global conflicts are frequent, geopolitical rivalry is intensifying, and the external environment facing China is more severe than in the first decades of reform and opening up. The drafting of the plan must therefore be highly aligned with the security environment, and the dual focus on development and security has become a core principle.

(2) The reasonable range of economic growth

As for the growth target, the 15th Five-Year Plan does not specify a particular growth rate, but instead proposes doubling per capita GDP by 2035 relative to 2020 and reaching the level of moderately developed countries. Yu Yongding noted that the prevailing academic consensus is that China’s economy needs to maintain an annual growth rate of 4.7% to 5% over the next five years to meet this long-term goal. In his view, the plan should be based on specific “point targets”, arguing that “range targets” complicate the coordination of plans across departments and regions.

(3) The concept of total factor productivity (TFP)

There is a general misunderstanding regarding the concept of total factor productivity (TFP). TFP is the part of output growth that cannot be explained by increases in capital or labour inputs, or the residual left over after the measurable contributions of factor inputs are stripped out. In the early 1980s, reforms such as the household responsibility system in agriculture and enterprise contracting sharply increased output despite limited increases in capital and labour. That unexplained increase was TFP growth.

But the gains from any particular reform are one-off and cannot continue indefinitely. Once these initial gains are exhausted, future output growth will depend primarily on input increases. At that point, the unexplained residual may fall to zero, and TFP growth will also fall to zero. However, that does not necessarily mean a decline in resource allocation or production efficiency. Therefore, TFP should not be treated as a rigid policy target. More practical indicators, such as labour productivity and capital-output efficiency, should be used instead.

II. Consumption and Investment: Breaking the Misconception of a “Consumption-Driven Economy”

Classical growth models and empirical research clearly show that long-term economic growth is driven by capital, labour, and technological progress. Consumption is not an independent variable in the production function, and consumption in the traditional sense is not a driver of growth. From Marx to the Harrod-Domar framework and neoclassical growth theory, the engines of growth have always been investment, labour, and technological advance, not consumption.

Cross-country empirical research also shows that consumption grows only after the economy grows, and consumption grows only after investment grows; the higher the consumption-to-GDP rate, the slower the consumption growth rate tends to be. Major global economies show a weak negative correlation between consumption rates and consumption growth.

Yu emphasised that some Western analysts advocate for China to shift from “investment-driven” to “consumption-driven” growth. However, such a proposition is a strategic trap that China must absolutely not adopt. Consumption (e.g., going to the gym) can serve as a driver of growth only insofar as it improves the supply of effective labour. But in this case, such “consumption” is an investment in human capital and is different from consumption in the usual sense.

III. Correct Understanding of “Vigorously Boosting Consumption”

It is necessary to distinguish between the consumption rate and the level of consumption: the consumption rate is a passive result, while raising the level of consumption is a development objective. In Sub-Saharan African countries, the consumption rate is close to 100%, yet they remain the poorest region in the world. A decline in the consumption rate may result from an increase in investment growth (as seen during China’s 2009 RMB 4 trillion stimulus package) and vice versa.

What China should pursue is a rise in the level of consumption, not an increase in the consumption rate, regardless of actual conditions. The rise or fall of the consumption rate should not be treated as a macroeconomic policy target. Doing so may conflict with the objective of achieving the desired economic growth rate.

At present, China faces insufficient effective demand. Actual GDP growth is lower than potential GDP growth, while consumption growth is lower than actual GDP growth. Under the present circumstances, stimulating consumption is indeed necessary. But the real challenge is not whether to expand consumption, but how to do so. Household consumption is a function of households’ permanent income. If current income and income expectations do not improve, it will be difficult for consumption to rise sustainably.

The key lies in improving household income expectations. Stabilising real estate prices, improving the social security system, refining the tax system, and equalising income distribution are all very important and must be actively advanced. But these tasks basically do not fall within the category of macroeconomic policy, and in the short term, they are unlikely to produce an immediately tangible effect on raising the economic growth rate. Issuing consumption vouchers and subsidising consumers may boost households’ temporary income and certainly can help promote consumption. However, their effect is likely limited and insufficient to reverse the current weakness in consumption.

To break the cycle where “raising growth requires boosting consumption” and “boosting consumption requires increasing growth,” the optimal choice is to increase infrastructure investment and raise its growth rate. In China’s current system, infrastructure investment is a macroeconomic adjustment tool in the government’s toolbox that does not depend on prior increases in household income or household consumption. Increasing infrastructure investment will increase long-term growth potential and address short-term effective demand gaps. Infrastructure investment not only has a significant multiplier effect, but can also generate a “crowding-in” effect that stimulates private investment.

The fundamental problem with distributing money directly or subsidising consumer goods to stimulate consumption is that: if the amount of money distributed is not large enough, the effect will be weak; if a large amount of spending is used to stimulate consumption, it may lead to a rapid rise in inflation. The U.S. experience from 2020 to 2022 offers lessons that should be learned.

The 15th Five-Year Plan mentions infrastructure 19 times, clearly laying out a comprehensive plan for national transportation networks, energy infrastructure, modern water networks, integrated computing power networks, and underground pipeline renovation. Underground pipeline renovation alone amounts to 700,000 kilometres, implying a massive investment opportunity. The 15th Five-Year Plan itself refutes the notion of “overcapacity in China’s infrastructure”.

Yu also pointed out that due to the public, long-term, and foundational nature of infrastructure, short-term profitability should not be overly emphasised with regard to infrastructure. Waste in some local infrastructure projects is indeed serious and must be corrected, but one should not overreact and abandon infrastructure investment altogether.

IV. The Problem of “Overcapacity”

China does indeed face overcapacity at both the industry and firm levels. In the main, overcapacity should be addressed through market mechanisms. If a particular industry or firm has excessive capacity and produces beyond demand, product prices will fall, and corporate profits will shrink. Firms in the affected sector will then close, merge, or restructure, reducing capacity. This adjustment process will continue until supply and demand return to equilibrium and prices stop falling. Industrial policy, such as environmental policy, can also play a role in resolving overcapacity. The persistence of overcapacity is related to deeper causes in the institutional arrangement and also to insufficient effective demand.

“Resolving overcapacity” is not a macroeconomic policy target. At the macroeconomic level, there are only two possible forms of imbalance:

• Aggregate demand exceeds aggregate supply (inflation, economic overheating)

• Aggregate demand falls short of aggregate supply (deflation, economic underheating)

Macroeconomic targets are growth, employment, price stability (2%), etc. There is no separate macroeconomic target of “eliminating overcapacity”, nor does the macro policy toolkit contain instruments specifically designed for that purpose. The fact that the “15th Five-Year Plan” does not mention “overcapacity” is worth reflection.

V. “Building a Modern Industrial System”

Given China’s special geopolitical position, its industrial system must have two features.

(1) Complete sectoral coverage, particularly in key sectors such as food, energy, steel, and information.

China has the world’s most complete industrial system. It is the only country that covers all industrial divisions, groups, and classes under the United Nations’ International Standard Industrial Classification, spanning 41 industrial divisions, 207 groups, and 666 classes. This does not, of course, mean that China must retain every section, division, group, and class.

(2) Complete industrial chains, especially for key products such as the production of central processing units (CPUs).

What households ultimately consume are final goods, but those goods are produced through long and multi-stage processes. Globalisation has fragmented the production of final goods, with different stages distributed across countries according to comparative advantage. Global industrial chains improve efficiency, but they also increase risk.

China should continue to participate actively in the international division of labour, leverage its comparative advantages, and improve resource allocation through trade and two-way investment. However, given China’s special geopolitical position, dependence on foreign sources in key sectors must be reduced as much as possible. For example, China’s external dependence on oil stands at 72%–78%, while that for natural gas exceeds 40%, underscoring the need to accelerate energy security building. In many critical products, including CPUs, operating systems, and industrial software, China must achieve full-chain independent control.

VI. Internal-External Balance and Risk Resolution

China has recorded trade surpluses of more than US$1 trillion for two consecutive years. At present, its current account surplus has risen to 3.7% of GDP (this figure still requires further verification). Dependence on external demand is relatively high, which could easily trigger trade frictions.

China should expand domestic demand, increase the fiscal deficit, and stimulate domestic investment and consumption; optimise export rebate policy to avoid excessive subsidy to overseas markets; and promote industrial relocation to central and western China rather than relying on one-way overseas relocation of capacity. In short, China should implement the central leadership’s strategy of “dual circulation, with domestic circulation as the mainstay.”

Current account surplus = (private savings – private investment) – fiscal deficit + investment income

This identity shows that China’s current account surplus exists because the gap between savings and investment is too large. The ways to balance the current account are:

1. increase consumption,

2. increase investment,

3. increase the fiscal deficit.

Put simply, a stronger expansionary macroeconomic policy would help rebalance China’s external trade. At the same time, export incentive mechanisms such as export tax rebates should also be reformed.

VII. Core Conclusions and Outlook

The 15th Five-Year Plan is firmly centred on both development and security. Its design is sound, and its direction is correct. China should continue to treat investment as the foundation and infrastructure as the stabiliser, reject the misconception of consumption-led growth, uphold manufacturing as the basis of national strength, and maintain full-chain independent control to safeguard national economic security. It should also straighten out the division of fiscal powers and administrative responsibilities between the central and local governments, defuse local government debt risks, seize the current policy window, and boldly implement expansionary fiscal and monetary policies. Provided policies are implemented effectively, and reform and opening up are upheld, China’s long-term growth potential will remain ample, short-term growth stabilisation targets can be successfully achieved, and China can steadily move toward the level of moderately developed countries.

At present, expansionary policy should be used boldly to finance infrastructure investment. Since the RMB 4 trillion stimulus, the contribution of the central government’s general public budget to infrastructure financing has been too low. China remains under deflationary pressure, while its fiscal position is relatively sound, its savings rate is high, and its stock of state-owned assets and net foreign assets is substantial. This means there is ample room for expansionary fiscal and monetary policy. There is no need to place excessive emphasis on “reserving policy space”. Instead, China should seize the current window to step up policy support, rather than risk losing room for manoeuvre once external shocks, such as rising oil prices or stagflation, begin to materialise. Under the leadership of the Party Central Committee and the State Council, China will certainly be able to maintain stable economic growth and successfully realise the second centenary goal of national rejuvenation.