China’s economic discourse, traditionally centered on fiscal stimulus measures, is increasingly highlighting profound structural challenges that necessitate fundamental institutional reforms. As the nation prepares its 15th Five-Year Plan, covering the period from 2026 to 2030, attention is shifting towards revitalizing Total Factor Productivity (TFP). TFP is recognized as a crucial driver for sustainable growth, extending beyond mere increases in capital and labor inputs, and is now considered paramount for long-term economic vitality.
Addressing Declining Productivity
Total Factor Productivity, which reflects efficiency gains and innovation, has experienced a notable decline in China. Its average contribution to growth fell from 4.1% in the 2000s to 2.6% in the subsequent decade, with a continuous downtrend observed since 2006. Experts, including Professor Liu Qiao, Dean of Guanghua School, emphasize that TFP must contribute 2% or more to future economic expansion. They contend that this critical improvement will primarily stem from systemic institutional adjustments rather than solely technological advancements. This perspective is reinforced by Zhou Tianyong’s observation that “80% of productivity comes from reforms, not technology,” underscoring the deep-seated nature of the required changes.
Reforming Local Governance Incentives
A pivotal area identified for reform lies in the incentives governing local authorities. President Xi Jinping recently signaled a significant shift in performance evaluation criteria for officials, urging that local debt levels be considered alongside traditional metrics such as GDP growth or the sheer quantity of projects executed. This represents a marked departure from a system that, as Goldman Sachs noted, often incentivized overproduction—even at a loss—because local governments derived substantial tax revenue from production volume. Economist Hui Shan further underscores that reforming these local leadership performance measurements is essential to effectively mitigate the nation’s pervasive industrial overcapacity.
Shifting Growth Targets Towards Consumption
While China has consistently championed “high-quality” development for years, it currently maintains an official economic growth target of 5%. However, experts like Professor Liu Qiao suggest this figure may be recalibrated to a more flexible range between 4.5% and 5%. Such an adjustment would provide local authorities greater latitude to prioritize consumption over fixed-asset investment. This shift is viewed as critical for addressing the nation’s persistent issue of industrial overcapacity and fostering a more balanced and sustainable economic development model.
Navigating Social Equity and Policy Constraints
The “common prosperity” initiative aims to elevate the incomes of 255 million citizens, thereby intending to bolster domestic demand and foster greater social equity. However, unlike some Western economies that implemented broad direct cash transfers post-pandemic, China has largely avoided such widespread direct stimulus measures. With limited scope for immediate, large-scale fiscal intervention in the current half-year, policy attention is now firmly centered on the strategic directives embedded within the upcoming quinquennial economic cycle.
The Path to Systemic Evolution
Looking forward, Zong Liang, a former researcher at the Bank of China, anticipates a governmental prioritization of consumption and a cautious, gradual favoring of the private sector. Transitioning an economy historically characterized by state planning and rigid targets presents a formidable challenge. Nevertheless, for China to ensure long-term, sustainable economic advancement, its forthcoming strategic plans must transcend short-term fixes and wholeheartedly embrace fundamental systemic evolution, paving the way for a more robust and resilient economic future.
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