Why China’s spending slump starts on the supply side

At the World Economic Forum’s “Summer Davos” in Tianjin, Premier Li Qiang made a bold promise: China would evolve into a “mega-sized consumer powerhouse.” It wasn’t just a slogan—it signaled a reorientation of the country’s growth model away from its decades-long role as the world’s factory and toward a future driven by domestic demand.

But policy ambition has yet to translate into consumer behavior. Despite subsidies, trade-in incentives, and high-profile campaigns urging households to spend, the recovery in consumption has fallen flat. Post-Covid optimism has collided with economic hesitation—and that mismatch raises fundamental questions about what's really holding back household spending.

Framing the issue as a “consumption problem” glosses over the complexity. In truth, three distinct—and interrelated—constraints are at play. And each one originates not in households themselves, but in deeper design choices baked into China’s economic structure.

Let’s start with the most obvious obstacle: too many families simply don’t have enough to spend. While exporters bounced back swiftly after 2021, household income growth failed to keep pace. In urban centers, the cost of living—especially for housing, education, and healthcare—continues to outstrip wage gains, eating into discretionary income.

This isn’t just post-pandemic drag. It’s the legacy of an economy built around production, not people. For decades, China prioritized capital over labor, pumping investment into infrastructure and industry while keeping wages low to stay globally competitive. The result? In 2023, household consumption amounted to just over 38% of GDP—a far cry from the U.S., where it exceeded 60%.

Taxation compounds the problem. China's system remains regressive, placing a heavier burden on working families than on capital. Social protections are fragmented and minimal, which forces households to shoulder out-of-pocket expenses that, elsewhere, might be absorbed by the state. Without structural shifts in income distribution and public spending, consumption growth will remain constrained—regardless of how much stimulus the government throws at it.

Even when the money is there, the willingness to spend often isn't. Households don’t just calculate their current balance—they factor in what tomorrow might bring. And right now, the outlook feels fragile. Take youth unemployment. By mid-2023, it had surged past 20%, before officials quietly stopped publishing the figures. Add to that a faltering property market, once viewed as a surefire path to middle-class security, and the mood darkens further. For many, these aren’t just data points—they’re warning signs.

Covid-era disruptions left a deep psychological scar. Many who once felt financially stable are now playing it safe. The national savings rate remains north of 30%, reflecting not just thrift but anxiety. It’s a rational response. When pensions are patchy, job protections uncertain, and medical costs high, households hedge against risk by cutting back.

Policymakers eager to “unlock” spending often lean on short-term levers—like vouchers or appliance rebates. But those tools barely scratch the surface. What’s needed isn’t another incentive—it’s restored trust in the system’s ability to support people when things go wrong.

Even if households earned more and felt secure enough to spend, the system itself isn’t built for them. At its core, China’s economy still puts producers first. Look at credit. Banks continue to prioritize loans to state enterprises and developers over households and small businesses. Mortgages remain relatively costly for first-time buyers. Personal credit access is inconsistent and heavily regulated, especially for rural or gig-economy workers.

Fiscal policy, too, follows a familiar script. Local governments chase GDP growth through infrastructure projects and industrial parks, not social welfare or income redistribution. Consumption remains a second-order goal—less tangible, harder to steer, and lower in political return.

This bias is no accident. For decades, the Party-state’s legitimacy has been anchored in visible development: steel output, highway miles, export volume. Shifting that focus toward consumption means relinquishing some control—and embracing a model of growth that’s less immediate, but more sustainable. So far, that pivot has yet to materialize.

Multinationals hoping for a broad-based consumer resurgence may need to temper expectations. High-end discretionary sectors—luxury fashion, electronics, leisure travel—are contending with a buyer base that’s more selective and price-sensitive than before.

That said, not all categories are suffering equally. Brands positioned around value, longevity, and health are gaining traction, especially among younger urban consumers trying to balance aspiration with caution. Meanwhile, opportunities are emerging in second-tier cities and among older demographics. Precision will matter more than ever: segmentation, not scale, will define success.

Markets often jump at announcements signaling new stimulus or “pro-consumption” drives. But performance data frequently tells a more muted story. Retail sales, while improving, remain inconsistent. Earnings from domestic consumer companies are still patchy. Property and labor concerns continue to weigh heavily on sentiment.

Rather than reacting to top-down messaging, investors should watch for signals of structural change. Are real wages rising? Is credit flowing more equitably? Are households gaining access to better public services? These are the shifts that will power sustainable consumption growth—not seasonal coupons or auto rebates.

Beijing faces a strategic fork in the road. It can continue to patch over weak consumption with short-term incentives—or it can address the foundations. That means strengthening healthcare coverage, easing education costs, expanding rural incomes, and making credit more accessible.

But deeper change also requires rethinking what “growth” means. Household consumption must stop being viewed as a byproduct of success and start being treated as a pillar of stability. Without this shift, every new stimulus cycle will end up chasing the same elusive goal: a truly self-sustaining consumer economy.

China’s struggle with consumption isn’t just about demand—it’s about design. The real constraint isn’t that people don’t want to spend; it’s that the system offers them few reasons to feel confident doing so. Premier Li’s rhetoric suggests a new chapter, but the core structure hasn’t caught up. As long as wages remain flat, social protections threadbare, and the economy skewed toward producers, household spending will remain an afterthought—regardless of political will.

Sustainable consumption takes more than public campaigns or fiscal gimmicks. It takes trust—built through security, fairness, and opportunity. For China to shift from growth at all costs to growth that benefits all, it must finally center the household. That’s not just a policy choice. It’s a political one.