Welcome back. The notion that China needs to rebalance its economy towards greater consumer spending is now well established. For over a decade, economists have been warning that there are limits to delivering high, sustained growth from Beijing’s investment- and export-led model.
But there is widespread scepticism that the Chinese Communist party can oversee a significant boost to household consumption. So this week, I asked analysts to outline why long-term consumer spending growth in China might surprise on the upside (even if that was not their view). Here’s what they said.
First, the downbeat narrative around China’s consumption underplays how large it already is. Consumer spending accounts for around 40 per cent of the country’s economy. Although the global average is about 20 percentage points higher, in absolute terms China’s consumer market is the world’s second largest (behind the US) and has grown at an unrivalled rate.
In the two decades prior to the pandemic, Chinese consumer spending grew at a compounded annual growth rate of 9 per cent in real terms, according to BCA Research.
Its share of global consumption far exceeds its share of global GDP in several aspirational and discretionary spending categories, based on data compiled by the McKinsey Global Institute. “China is the largest market in terms of volume and value for almost any consumer product — ranging from vehicles and smartphones to luxury goods and cinema,” says Rory Green, chief China economist at TS Lombard.
For measure, it would not take much for China to replace exports to the US with domestic consumption. Calculations from Capital Economics show that retail sales in the country are 10 times larger than its exports to America.
High production has, in part, helped to nurture China’s domestic retail market. Goods and services are relatively cheap. (On a purchasing power parity basis, China has a bigger economy than the US.) This means high-income households can sustain decent living standards using less of their salary.
Despite economic pressures, young Chinese consumers are also not retreating from spending. “Gen Z and millennials are still eagerly spending on travel, outdoor experiences and gaming”, said Keyu Jin, a global economist currently affiliated with the Hong Kong University of Science and Technology. “The bulk of consumer credit goes to people under 35. With one click on Alibaba, you can borrow to buy a lipstick.”
Simply put, there is an established consumer culture in China that provides a large, solid base on which to grow. By 2030, Boston Consulting Group estimates that the country’s middle- and upper-class population will exceed half a billion people (well above the entire US population). This means even a slight uplift in spending propensities would notably boost total consumption. The nation’s uniquely high levels of investment and savings have detracted from this.
China’s zero-Covid pandemic approach and its real estate crash have, however, scarred households. Consumer confidence remains significantly below pre-2020 levels, and precautionary savings are elevated.
There are nascent signs of a turnaround. “Households have now largely filled the hole in their balance sheets from the decline in property prices with bank deposits,” says Adam Wolfe, emerging markets economist at Absolute Strategy Research. “House prices are stabilising, and demand for safe financial assets should ease.”
A first-quarter Deutsche Bank poll found that 52 per cent of Chinese consumers were willing to increase their discretionary expenditures, the highest share in a year.
Stimulus initiatives have helped a bit. In September, the People’s Bank of China reduced bank reserve requirements, cut mortgage rates and boosted support for the equity market. In March, the government outlined a “special action plan” which included promises of higher wages and childcare subsidies. A trade-in scheme — which provides financial incentives to exchange old goods for new ones — is also propping up expenditure. But further jolts are needed.
Still, a sustained, long-term increase to consumer spending would require a permanent boost to household confidence and a significant reduction in savings.
Beijing’s long struggle to raise consumption and its focus on production have however caused analysts to doubt that households can play a significantly stronger role in its economy. There are three upside structural risks to that view: reforms, urbanisation and demographics.
The importance of raising consumption has gained political traction. It also dovetails with President Xi Jinping’s philosophies of “dual circulation” (strengthening domestic and international demand) and “common prosperity” (reducing inequality).
US President Donald Trump’s global tariff agenda adds a further nudge to Chinese policymakers. Disruptions to external demand raises the salience of its internal market. Trade partners are also on alert for US-bound exports from China being diverted elsewhere. Beijing will be wary about burning bridges, and may be more conscious about exporting its high production abroad.
“After years of trade-related tensions with the European Union, Australia and other major players, Beijing may see an opportunity to bolster its global standing by playing nice on trade while Washington continues to play hardball”, says Morning Consult’s head of political intelligence, Jason McMann.
Urbanisation is another potential upside. Two-thirds of China’s population live in cities. In OECD nations, the average is above 80 per cent. Continued and faster migration to urban areas would boost income and spending on services.
China’s Hukou household registration system does however limit rural migrants’ access to social services and benefits in urban areas. Rhodium Group reckons granting full access to basic urban services would significantly boost consumption. A 2025 study found migrants’ per capita consumption increased by 30 per cent when they move to a city, with an additional 30 per cent rise when they are fully integrated into urban life.
More broadly, even the capitalist-in-chief US spends more on social transfers than communist China. Beijing also only raises around 1 per cent of its GDP from income tax, well below advanced economies.
China’s weak welfare system incentivises higher precautionary savings (and a reliance on debt in poorer, rural areas). Xi has spoken against “welfarism”. But what China has now is some way off a system that “encourages laziness”.
Further, long-term uplift could come from its ageing population. As a higher proportion of Chinese retire, the ratio of savers to consumers will decline.
“In east Asia the pattern of high working-age saving is particularly strong”, notes Green. Indeed, South Korea and Japan also both experienced peak savings rates when the working-age share of their populations topped out.
Green reckons China’s choppier population pyramid could result in a faster drop in its savings rate, relative to other Asian nations. “Even if policy reforms are ineffective, China is going to save less”, he said in a recent note.
President Xi remains focused on “new quality productive forces”. This could indeed support jobs and income. But Michael Pettis, senior associate at the Carnegie Endowment for International Peace, says that it would be unrealistic to rely on this strategy alone to boost consumption.
Generating the required productivity gains, and ensuring they mostly accrue to workers, will be an uphill task. Indeed, the efficiency of China’s capital spending has been on a downtrend, according to BCA Research. “It has led to excess capacity, deflation and scores of lossmaking enterprises”.
Other options to sustainably boost household incomes would necessitate significant policy reform (which Beijing so far has been hesitating over), says Pettis. “Beijing could transfer income from local governments, particularly to poorer, more indebted households. Or it could strengthen the social safety network.”
Continuing the shift into higher-value added production could support growth. It will require more targeted investment. But if Beijing is serious about turning China into a “medium-developed country” by 2035, it needs to unleash the potential of its large consumer base.
Short-term stimulus packages help. But they do little to raise long-term household confidence. Welfare (and tax) reforms would recycle high savings into spending in the real economy, generate higher growth from urbanisation and, in turn, help build China’s mature and innovative retail ecosystem.
Policymakers are taking consumption more seriously. Gradual, albeit small-scale reforms have been taking place within the hukou, pensions and benefits systems. As the economic and geopolitical limits of the country’s existing growth strategy becomes clearer, Beijing could leverage its centralised policy apparatus to turbocharge consumer spending.
“Beijing has time and again demonstrated the ability to do the unexpected, to reach its longer-term goals,” says David Goodman, director of the China Studies Centre at the University of Sydney, who has been studying the nation for more than 50 years.
China’s consumers have struggled in recent years. But there is enormous spending power yet to be unlocked, and Beijing holds the key.
Send your rebuttals and thoughts to freelunch@ft.com or on X @tejparikh90.
Food for thought
Economists are always looking for ways to enhance their forecasting capabilities. This IMF paper introduces a “nowcasting” model that leverages satellite-based data of global maritime movements.
Read the full article here
