China’s consumption pitch met with reluctance
If direct subsidies have been unable to substantially lift China’s domestic consumption, what will?
For the past two years, the Chinese government has been counting on a rebound in household consumption to stoke economic growth amid highly volatile global markets, but cautiousness has prevailed.
Retail demand has been largely anaemic, even with an array of subsidies funded by both the national and local governments. Chinese households have had the opportunity to avail of cheaper loans, supported by interest rate cuts and extra liquidity pumped by the central bank. In addition, a gadget trade-in program was introduced, meant to lure consumers to buy new home appliances, smartphones, and even electric vehicles by handing in their old equipment in exchange for a 15 per cent price subsidy. However, the appetite for such has been low. Regardless, China’s GDP managed to expand by 5 per cent in 2024 and 2025 despite relatively weak retail sales growth. The trade-in scheme has been extended for 2026, but its impact is likely to be muted.
A nation of savers
The reluctance to spend amid challenging times is culturally rooted: apart from typical frugality, there is shame attached to perceptions of luxury expenditures. This runs counter to spending stimulus programs from the government, and even though these old-for-new purchase programs target middle-class earners, the very same push for modesty is holding back claims.
Chinese families are also savers by nature. Graph 1 shows just how high the national saving rate is compared to other countries and economic blocs. Savings held by Chinese households account for nearly half of national output, averaging 43.6 per cent of GDP over the last decade. This is the fourth-highest saving rate globally according to data from the International Monetary Fund (IMF), just behind oil-rich Kuwait, Iran, and Qatar. Most mature economies do not reach this level of saving, with the EU averaging at 25 per cent and the US at 18 per cent of GDP between 2016 to 2025.
The practice of saving up for rainy days is not all bad – in fact, it is an indicator of overall financial health. However, this also means that so much money is kept idle as these savings are held as cash rather than invested into productive uses, whether for personal consumption or to fund infrastructure development. This also explains China’s disinflation problem that is driven by lacklustre consumer demand, which is particularly concerning for a nation with a domestic consumer base of more than a billion people. Buying decisions are also held back by expectations that prices will stay low or go down further, which prolongs China’s deflation cycle and ultimately hurts GDP growth.
The Chinese government is aware of the perils of weak domestic consumption, which explains the emphasis given towards boosting such through policies outlined in the nation’s latest Five-Year Plan for 2026 to 2030. Support for household spending has taken front and centre under the new plan, deviating from China’s typical strategy of fuelling growth through public investments and expanding export volumes. Further, the decision to scale down the growth target to a 4.5-5 per cent range for this year is also a recognition of the perennially soft domestic consumption and how it has been holding back the Chinese economy in the last few years. Even the IMF has been nudging China to transition into a consumption-driven economy from its current export-led model – a shift made more urgent by global trade disruptions. The prevailing hurdle is consumer confidence remaining subdued since the property market collapse of 2021.
Income keeping up
Chinese households have enough resources to spend more – at least, that is what the data is saying. Graph 2 captures how the year-on-year growth in disposable incomes has outpaced the growth in total retail sales, which furthers the view that China’s tepid consumption story is not due to limited resources. For instance, between 2021 and 2025, income growth averaged 5.4 per cent against the average retail sales growth of 5.2 per cent. Inflation is not a concern either as prices stayed flat in 2025, yet retail sales growth remained modest. Prices of basic goods and services rose by 0.7 per cent average pace over the same five-year period, yet sales have not picked up.
The government is looking to roll out an “income growth plan” to bridge the financial gap between urban and rural households, with the goal of raising purchasing power across the country. This seeks to address the notion that lower rural incomes, along with lower social pension benefits, are pushing these residents to spend less and save more. Meanwhile, China is allocating RMB 250 billion (USD 36 billion) for an extension of the goods trade-in program, which will sustain the provision of subsidies for purchases of new vehicles and gadgets. Longer holiday periods are also scheduled for 2026, which began with a nine-day Spring Festival break last February, to encourage families to travel domestically for greater tourism revenue. However, consumer optimism has yet to return to pre-2022 levels, indicating that general pessimism has been hounding economic prospects since.
Consumption stimulus programs appear to be a quick fix for China, but this also carries the risk of raising public debt levels that, in turn, creates more problems for the economy. As it stands, a debt burden of 88 per cent of GDP does not look good at face value. However, global investors may view this as China putting money where its mouth is. Surely, the transformation will not happen overnight – sparking a change in spending behaviour among Chinese consumers will take longer – but it is a step in the right direction. We remain upbeat about China’s growth prospects, which we view as more exciting and value-adding for investors compared to returns on offer in mature economies.
