The Chinese government has introduced economic policies to boost domestic consumption and revitalize its lagging economy, including expanded childcare subsidies, pay hikes, and enhanced paid leave. A $41 billion discount scheme has also been launched, covering various products, from dishwashers and home décor to electric cars and smartwatches.
Beijing expects these incentives to inspire consumers to make more purchases. In other words, they are not spending enough to strengthen China’s economy.
With retail sales rising by 4% in the first two months of 2025, recent official data presented some encouragement. Still, compared to the previous year, new and existing housing prices kept falling outside of a few exceptions like Shanghai.
Why is deflation rather than inflation what China is experiencing?
While many big economies—including the United States—have struggled with post-pandemic inflation, China is experiencing deflation. National prices have been declining for eighteen months over the previous two years.
From the first look, consumers would benefit from lower pricing. However, a continuous decline in consumption, a main indicator of household expenditure, points to more serious economic problems. Businesses cut prices to draw customers when consumers hold back on spending. Therefore, this lessens profits, inhibits hiring, stagnates salaries, and undermines economic momentum.
China is keen to prevent this cycle, especially given its ongoing struggle with slow development resulting from a protracted property market crisis, heavy government debt, and growing unemployment.
“The property market matters not only for real economic activity but also for household sentiment since Chinese households have invested so much of their wealth in their homes,” notes economic commentator Gerard DiPippo. “I don’t think China’s consumption will recover until it’s clear that the property sector has bottomed out, and hence, many households’ main assets are starting to recover.”
Why aren't Chinese consumers spending?
Weak domestic consumption has simple roots: Chinese consumers either lack enough money or lack confidence in their financial prospects to spend it.
This resistance arises at a pivotal point. The government has established an ambitious target of 5% economic growth in 2025, so increasing domestic consumption comes first. Rising consumer spending is supposed to boost the Chinese economy and help balance the effect of U.S. tariffs on Chinese exports.
Beijing closed its annual National People’s Congress with an economic plan based on more investment in social welfare projects to address this. Subsequently, the administration promised more, including employment support schemes. Still, there are few specifics.
Will these steps suffice to modify spending patterns?
Though some commentators support Beijing’s initiatives, more thorough reforms are required. These include better pay, a more robust social safety net, and laws establishing financial security, which would motivate individuals to spend instead of save.
About 25% of China’s employment comprises low-paid migrant laborers who do not fully access urban social programs. This makes them especially vulnerable during recessionary times, including the COVID-19 epidemic.
A pay rise of almost 10% yearly in the 2010s helped conceal some structural problems. However, when the pay rise halted in the 2020s, saving became once more essential.
China has historically concentrated on temporary fixes to increase consumption, such as trade-in programs for gadgets and home appliances. DiPippo points out, “Household incomes are lower, and savings are higher,” so this strategy does not solve the basic issue.
What changes in consumer behavior has the property market brought about?
The almost collapse of China’s property market has made customers more risk-averse, reducing their expenditure.
Among the highest in the world, a Chinese think tank, YuWa’s analysis of raising a child to adulthood in China shows that this costs 6.8 times the GDP per capita. By contrast, the cost in the United States is 4.1 times GDP per capita; in Japan, it is 4.3; and in Germany, it is 3.6. With Chinese households saving thirty-two percent of their disposable income in 2024, these financial strains have strengthened a strong saving culture.
Domestic consumption stayed rather low in China compared to other big economies, even during years of consumer boom. While China’s contribution has always hovered between 50% and 55%, consumption drives more than 80% of growth in the United States and the United Kingdom and almost 70% in India.
Has customer behavior altered fundamentally?
Chinese consumers used to laugh about their irrepressible need to shop online, dubbing themselves “hand-choppers”—they needed to cut off their hands to resist pressing the checkout button.
Rising incomes drove a spending frenzy, and November 11, Double 11, became the largest shopping day worldwide. In just 24 hours, Double 11 sales in 2019 reached a startling 410 billion yuan ($57 billion).
Still, the most recent Double 11 was underwhelming. An online coffee bean vendor in Beijing remarked, “If anything, it caused more trouble than it was worth.”
Since the epidemic, Chinese consumers have become more frugal; this careful buying behaviour continued even when limits were removed in late 2022. Major e-commerce sites like Alibaba and JD.com have thus ceased releasing sales figures—reportedly under official advice—to prevent further erosion of consumer confidence.
Even luxury brands have had effects. In 2024, LVMH, Burberry, and Richemont reported dropping sales in China—a sharp contrast to past years when Chinese buyers propelled worldwide luxury markets.
Postings marked with “consumption downgrade” on RedNote, a well-known Chinese social media platform, have attracted over a billion views. Users offer advice on substituting less expensive choices for pricey products. “Tiger Balm is the new coffee,” one user remarked; another wrote, “I apply perfume between my nose and lips now—saving it just for myself.”
Will Beijing welcome an economy led by consumers?
Exports supported by significant government infrastructure and industry have long been China’s economic expansion engine. This approach depended on cheap labor and large household savings.
As geopolitical questions grow, nations move supply chains away from China to become less dependent on Chinese exports. Local governments, however, are grappling with significant debt from years of borrowing to fund infrastructure projects.
Declaring that domestic demand is “the main driving force and stabilizing anchor of growth,” President Xi Jinping Emphasises the extent of the opportunity; national individuals Congress representative Caiyun Wang said, “With a population of 1.4 billion, even a 1% rise in demand creates a market of 14 million people.”
Analysts warn, meanwhile, that changing from a state-driven to a consumer-driven economy would call for significant structural changes like rebuilding consumer confidence among new graduates trying to find employment or purchase a house. It would also involve altering a very strong saving culture.
“China’s extraordinarily low consumption level is not an accident,” notes a senior fellow at the Carnegie Endowment for International Peace, Michael Pettis. “It is basic to the model of economic development of the nation. Changing this is not going to be simple.”
In the end, even if past Chinese leaders have pushed private consumption, their main objective is to strengthen the country rather than prioritize individual welfare. Still up for debate is whether people are ready to make the required adjustments to utilize the Chinese economy fully.
