Against the backdrop of China's impeded economic circulation, characterized by insufficient domestic demand, this article based on the practice of the socialist market economy, critically draws on Marxist theory of “Three-circuit” of capital to construct a theoretical framework for analyzing contemporary China's economic circulation: the “Three-circuit” of the Chinese national economy with its distinct characteristics. The core characteristic lies in the institutional constraints and strategic guidance imposed by the socialist public ownership of the means of production on the profitability-seeking nature of capital, with the entire national economic circulation serving the purposes of socialist production. Utilizing this framework to analyze China's economic practice across three phases since the tax-sharing system reform, this paper reveals that excessive reliance on the “secondary circulation” and neglect of the “tertiary circulation” are underlying causes of insufficient domestic demand. Consequently, this article proposes a reform strategy of “dual transformation”: on the one hand, increase investment in scientific and technological innovation and people's livelihood development represented by affordable housing to change the mode of economic development; on the other hand, coordinate and advance related institutional reforms, transform the incentive and constraint mechanisms of local government behavior, while appropriately retaining the proactive role of local governments in conducting infrastructure investment and buffering economic fluctuations