Introduction
Since late 2022, Chinese authorities have recognized that a decline in consumer demand posed a significant threat to the economy. While recent stimulus measures have helped alleviate some of the downward pressure, more can be done to boost household purchasing power.
Economic Improvement and Government Stimulus
There are signs that China’s economy has been improving, thanks to the government’s stimulus package in September 2024. The annual GDP growth rate reached 5.4% in the first quarter of this year, continuing the marked acceleration seen in the third quarter of the previous year.
The shift in policy direction became evident in late 2022 when Chinese policymakers acknowledged that the decline in demand had become a serious issue. The primary cause was the real estate market, where the bursting of the price bubble severely impacted local government revenues, reducing real estate and business income for residents (a significant portion of disposable income) and leading to lower consumer spending.
Government Measures to Support Local Governments
To alleviate pressure on local governments, the central government allowed them to expand their financing by issuing 1.4 trillion dollars worth of long-term bonds (over five years) to replace short-term debt. The proceeds from long-term bond issuances were also used to bolster the balance sheets of state-owned commercial banks and enhance their credit-generating capacity.
Meanwhile, the central bank maintained a faster credit growth rate but has been cautious about lowering official interest rates. With China’s real interest rates above 4%, a significant rate cut is inevitable due to concerns about currency volatility and the financial health of commercial banks.
Stabilizing Housing and Stock Markets
Chinese authorities understood that stabilizing the housing and stock markets could mitigate the slowdown in consumer spending. Consequently, their stabilization strategy requires local governments to use a portion of their special debt financing to purchase unsold residential properties in the market and use them as guaranteed housing for local residents. State-owned non-bank financial institutions are also required to buy back and hold more shares.
These measures might seem unbelievable in another country, but China’s state-owned financial system makes them viable.
Social Support for Increased Public Assistance
There is broad social support for expanding public assistance to household incomes. During the National People’s Congress in early March, increasing incomes and expanding protection for the elderly and children were heavily debated topics. Although the government increased the minimum urban and rural basic pension payout by another 10% this year, most economists suggested that the level should be much higher.
Pension demands reflect significant regional disparities. The basic pension in Beijing and Shanghai is nearly 5 to 7 times the national average due to substantial differences in local subsidy capabilities and cost of living. To broaden overall consumer spending, it’s crucial to reduce regional disparities in healthcare and pension protection levels.
Demographic Factors Influencing Consumer Spending
Chinese household consumption is highly correlated with family size and the number of children. However, alongside aging, China also grapples with a low fertility rate. Although the government has lifted fertility restrictions, allowing families to have three children, the rate remains around one. Younger Chinese cite high child-rearing costs as the primary reason for not planning more children.
In response, the central government has pledged to formulate a national policy to subsidize fertility and child-rearing within a year, while many cities have already implemented local policies to subsidize or reward fertility. For example, a city in Inner Mongolia recently offered a 50,000 yuan subsidy for a second child and 100,000 yuan for a third.
Urbanization and Consumer Demand
Almost 70 years have passed since China implemented its household registration system (hukou), limiting rural residents’ internal migration options. However, with millions of migrant workers flocking to major cities, facilitating their integration has become crucial. China must ensure equal access to jobs and public benefits, including childcare, education, employment, healthcare, and pensions, for all residents.
This urbanization will significantly expand the scale of consumer demand. If more families receive larger government transfers—either in the form of pensions or fertility incentives and subsidies—it will boost household spending on services such as childcare, education and training, healthcare, and elderly care. These are precisely the untapped segments of China’s consumer demand.
China’s Technological Advancements
Recent advancements by DeepSeek have highlighted China’s progress in AI and high technology. With its vast, diverse national economy, abundant talent pool, and well-developed supply chains, China has the potential to advance cutting-edge technologies. Continued technological progress will enable the country to produce high-value-added goods, with all the benefits that entails for incomes, productivity, and domestic service demand.
However, government programs must adapt to this new development phase. As large-scale construction has reached its limit, policies should now focus on ensuring that labor receives a larger share of national income. This means allocating more fiscal resources to support household incomes and providing better, more equitable social protection.
Increasing household incomes and reducing savings rates are essential to unlocking the purchasing power of China’s 1.4 billion people.
About the Author
Zhang Jun, dean of the School of Economics at Fudan University, is director of the Chinese Economic Studies Center, a Shanghai-based group of experts.
Copyright: Project Syndicate, 1995 – 2025 www.project-syndicate.org
