Industry interaction is becoming an important approach to promoting high-quality economic development. In this paper, the multi-sector general equilibrium model is developed to clarify the theoretical mechanism among industry interaction, structure transformation, and high-quality economic development; the empirical tests are carried out based on the provincial panel data from 2000 to 2017; and the empowerment paths for digital technologies are explored to drive high-quality economic development. The findings are as follows. (1) The industry interaction can promote high-quality economic development in China on the whole, but it shows a significant imbalance and a healthy two-way promotion mode have not been formed. (2) The impact of industry interaction on high-quality economic development is significantly heterogeneous at the sector and regional levels. (3) The current unhealthy industry interaction may widen the productivity gap between manufacturing and service sectors, and transform China’s economic into service-oriented structure, thus leading the economic development to a vicious circle of “low efficiency to low-end servitization and further to lower efficiency,” and hindering the sustainability of high-quality economic development. (4) Digital technologies can break the development dilemma and achieve high-quality economic development by alleviating structural contradictions, boosting healthy industry interaction, and narrowing the productivity gap among sectors. The conclusions provide empirical evidence for the government to promote the integration of advanced manufacturing and modern service sectors and achieve high-quality economic development.

Comprehensively implementing supply-side structural reform is a major adjustment of ideas and focus of China’s economic development, made by the Communist Party of China (CPC) Central Committee on the basis of a comprehensive analysis of the world’s long-term economic cycle and the new normal of China’s economic development. As a major innovation to adapt to and lead the new normal of economic development, it has become a strategic deployment that concerns the overall long-term development of China’s economy and society. Before the 19th CPC National Congress, the main tasks of supply-side structural reform were cutting overcapacity, destocking, deleveraging, reducing corporate costs and shoring up weak links. After the 19th CPC National Congress, while continuing to do the tasks, the CPC Central Committee stuck to the main direction of improving the quality of the supply system, enriching the connotation of deepening supply-side structural reform. Since 2016, China’s supply-side structural reform has achieved remarkable results, and has been widely recognized and positively evaluated both internationally and domestically. The reform provides not only a solid foundation and valuable experience for China’s subsequent reforms, but also a useful reference for developing countries.

In essence, understanding the relationship between supply-side structural reform and demand-side management requires grasping the interplay between supply and demand. Supply and demand are interdependent and interactive, and their equilibrium determines the equilibrium values of micro and macroeconomic variables. Focusing solely on either supply or demand, regardless of the time length, is one-sided. To promote supply-side structural reform, China should depend on demand and take a measured approach to its expansion. In the absence of demand, the supply-side structural reform would lose its direction and purpose. Enhancing demand-side management involves delving deeper into supply-side structural reform because the scale and growth of demand, alongside changes in demand structure, are fundamentally influenced by institutional factors. Hence, further reforming the systems and mechanisms that hinder the optimization of demand structure and the growth of demand is precisely what supply-side structural reform should entail.

Along with the changes in China’s development stage and internal and external conditions, sci-tech innovation has become the core driving force for China’s high-quality economic development in the new era. From the perspective of finance-driven technological progress, this paper constructs an endogenous growth DSGE model to analyze the relationship between financial resource allocation, technological progress, and economic growth. This study proves the counter-cyclicality of technological innovation in China, and finds that the allocation of financial resources between enterprises’ productive investment and innovation investment can affect economic growth by changing the scale of factor inputs and technological progress rate, and that there is a see-saw relationship between these two effects, with the latter dominant. On that basis, this paper explains the dynamic transmission mechanism among finance, technology and economy. During the economic expansion period, enterprises expand their production scale, financial resources provide more support to productive investment, with less support to innovation investment, thus the technological progress rate goes down; and during the economic contraction period, enterprises reduce their production scale, financial resources cut support to productive investment and turn to innovation investment, so technological progress rate goes up. The implications of this study on policy are as follows: when faced with new contradictions and challenges in the current development stage, China should get a grip on the new development pattern, seize new opportunities, further deepen financial reforms, optimize the financial resource allocation mechanism, encourage innovation investment, and give full play to the role of equity markets in supporting corporate R&D and innovation. Meanwhile, coupling with prudent and moderate macro-control policies, China should provide a positive macro-environment for corporate innovation, stimulate corporate on innovation demand, promote technological progress, and boost high-quality economic development.

As an important strategic direction of China’s 14th Five-Year Plan, strengthening demand-side management aims to build an effective system to boost domestic demand, establish a complete demand system, and develop a robust domestic market, thereby promoting the realization of the growth goals by 2035 and the second centenary goal by the mid-21st century. Different from traditional aggregate demand management, demand-side management introduces a host of new attributes pertaining to its regulatory scope, regulatory goal, regulatory strategy, regulatory target, and regulatory instrument. Demand-side management does not seek to replace aggregate demand management; rather, both assume pivotal roles in macro-control and their coordination are of utmost importance. In real scenarios, demand-side management should synergize with supply-side structural reform, which is helpful to foster a new development pattern with domestic circulation as the mainstay and domestic and international circulations reinforcing each other. To effectively implement demand-side management, it is imperative not to replicate the approach used in aggregate demand management. Only by further innovating and improving the macro-control system with Chinese characteristics and coordinating the stability policy, growth policy and structural policy can the demand-side management be truly implemented under the new framework of “Macro-policy Trinity.”

In recent years, the changes in the external environment and domestic development conditions have promoted the transformation of China’s economy to one dominated by domestic circulation. In December 2020, the Communist Party of China Central Committee put forward the demand-side reform for the first time in order to prepare China for the new development stage of the 14th Five-Year Plan (2021–2025) and to promote the new strategic deployment of China’s high-quality development. Based on the paths and direction of the current 14th Five-Year Plan (2021–2015) to build a new development pattern, this paper elaborates on the theoretical connotations of the demand-side reform, points out the bottlenecks such as the unreasonable demand structure in China, the mismatch between the industrial system and the high-level demand, the resulting demand spillovers, the poor demand channels, and puts forward the current approaches to the demand-side reform in China.

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Beginning with increasing effective demand, the demand-side reform advocates for the strategy to expand domestic demand, rectifies distortions in the demand structure, and further aligns demand and supply by reforming the mechanisms for demand formation and regulation, matching supply and demand structures, and easing restrictions on demand. This will enhance economic growth potential and operational efficiency. The demand-side reform contributes to developing a super-large-scale market and optimize market functions to form a unified national market. It also helps address significant structural distortions within domestic circulation and move faster to form a new development pattern of dual circulation. As demand-side reform inevitably deals with the vested interests of stakeholders, it presents challenges on par with supply-side structural reform. Therefore, due attention must be given in terms of priority and weight by increasing operational and property household income, transforming government functions, rectifying any excessive market-oriented reforms in certain public service sectors, among others.

Modernizing the industrial system is an integral and strategic priority within the broader scope of modernizing the economic system. It demands a focus on boosting China’s labor productivity and self-sufficiency rate of key technology products, with the aim to advance industrial upgrading and optimize the industrial structure. Hence, China must promote the strategy to expand domestic demand and accelerate the creation of a new development pattern from the supply side, coordinate economic development across regions, establish a national unified market, and create a more open industrial system. Specifically, China should increase funding in scientific research and experimental development, enhance the innovation capacity of core technologies in key fields, optimize the digital economy structure, strengthen the modern service industry, raise the labor productivity of the service industry, maximize the market’s decisive role and the government’s function in resource allocation, and build a talent system tailored to the modern industrial system.

The fifth plenary session of the 19th Central Committee of the Communist Party of China (CPC) puts forward the organic combination of the implementation of the domestic demand expansion strategy with the deepening of supply-side structural reform, and scientifically reveals the internal logic of this organic combination and the realization paths, which is of great significance to the implementation of the new development concept and the construction of a new development pattern. First, this paper provides a theoretical explanation for the organic combination of the domestic demand expansion strategy with the supply-side structural reform by analyzing why the traditional policies for expanding domestic demand are ineffective in the new development stage of China. Second, this paper elaborates the internal logic of this organic combination from two aspects. (1) The base point of the domestic demand expansion strategy must be placed under the main line of the supply-side structural reform. (2) The two should be interconnected and are mutually reinforcing, so as to form a higher level of dynamic equilibrium in which the demand leads the supply and the supply creates the demand. Third, this paper analyzes the huge space for the organic combination of the domestic demand expansion strategy with the supply-side structural reform from the perspective of releasing consumption potential and creating new demand, and on that basis proposes the realization paths of their organic combination.

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By constructing a New Keynesian dynamic stochastic general equilibrium (DSGE) model that embeds structural fiscal policy and contains two types of households, labor intermediaries, manufacturers, the central bank, and fiscal departments, and based on China’s macroeconomic controls that combine proactive fiscal policy with prudent monetary policy in the context of supply-side structural reform, this paper compares and analyzes the macroeconomic effects of the various types of proactive fiscal policy instruments, and measures the impact of the choice of anchors for monetary policy on the long-term welfare loss caused by the various fiscal policy instruments. This study finds that the consumption-oriented fiscal expenditure increase and labor income tax reduction policies have the most significant macroeconomic stimulus effects in the short term, but attention should be paid to the disadvantage that they may lead to the rise of government debt risks; and in the long term, the role of production-oriented fiscal expenditure policies in guaranteeing the stable operations of China’s economy should be brought into play. In addition, once the implementation of proactive fiscal policy lasts for too long, their long-term effects may be weakened, with negative macroeconomic impacts. In order to mitigate the resulting long-term economic fluctuations and welfare loss, prudent monetary policy should be fine-tuned with price stability as the anchor.

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