[By Taye Parikh]
It is now widely accepted that China needs to rebalance its economy to promote more consumer spending. For over a decade, economists have warned that China's growth model, which is investment and export-led, has natural bottlenecks when it comes to sustaining high growth rates.
However, there remains widespread skepticism outside of China about whether the country can effectively drive a significant increase in household consumption. In response to this, I have invited several analysts to discuss together why long-term growth in Chinese consumer spending may exceed expectations (even though this is not necessarily their core viewpoint). Here are the main points of analysis:
First, the current pessimistic discourse on Chinese consumption underestimates its existing scale. China’s consumer spending accounts for around 40% of its economic total, which is roughly 20 percentage points lower than the global average. However, measured in absolute terms, China’s consumer market ranks second globally (after the United States) and continues to lead the world in growth rate.
Left caption: Chinese household spending has grown far faster than other comparable countries. The figure shows the cumulative change in annual household consumption (in trillions of US dollars) since 2004 for various countries (from left to right: China, the U.S., the EU, India, Brazil, Japan); Right caption: The main economic imbalance is excessive investment. The figure shows changes in the proportion of four economic indicators to real GDP (exports, government consumption expenditure, total fixed capital formation, household consumption) from Financial Times.
According to BCA Research data, in the twenty years before the outbreak of the pandemic, China’s actual compound annual growth rate of consumer spending reached 9%. Data from the McKinsey Global Institute also shows that China's share of global consumption totals exceeds its share of the global economy in many categories reflecting消费升级 and discretionary spending. Rory Green, chief China economist at TS Lombard, pointed out that "in terms of quantity and value, from cars, smartphones to luxury goods and movies, China is almost the largest market for all consumer goods."
Notably, China has the full capability to replace the scale of exports to the U.S. through domestic consumption. According to calculations by Capital Economics, China's retail market size has reached ten times that of its exports to the U.S. Expansion of capacity has also driven the development of the domestic retail market, with significant advantages in commodity and service prices (calculated by purchasing power parity, China's economy has surpassed that of the U.S.), allowing high-income groups to maintain a high standard of living at relatively low costs.
Despite economic pressures, China's younger consumer groups have not reduced spending. "Generation Z and millennials are still actively consuming travel, outdoor experiences, and gaming products," said Jin Kechu, a global economist at the Hong Kong University of Science and Technology. "Consumer credit primarily flows to those under 35 years old, such as borrowing to buy lipstick with one click on Alibaba's platform."
In short, China has already established a solid foundation for consumption culture. Boston Consulting Company predicts that by 2030, China's middle-to-high-income group will exceed 500 million people (far exceeding the total population of the U.S.). This means that even a slight increase in marginal propensity to consume can significantly boost overall consumption. On the other hand, China's unique high-investment, high-savings model poses a constraint.
Left caption: China holds the largest share in the global e-commerce market. The figure shows the global online retail sales share (%) for 2024; Right caption: Huge savings highlight the potential of consumers. The figure shows the proportion of total savings to disposable income (%) for various countries (averaged over 10 years) from Financial Times.
However, due to the impact of the pandemic and the shock to the real estate industry, current consumer confidence remains significantly below pre-2020 levels, leading to increased precautionary savings. Despite this, we can still see signs of economic recovery in China.
"Now, households have largely filled the balance sheet gap caused by falling housing prices with bank deposits," said Adam Wolfe, emerging markets economist at Absolute Strategy Research. "House prices are stabilizing, and demand for safe financial assets should weaken."
A recent survey by Deutsche Bank found that 52% of Chinese consumers were willing to increase discretionary spending, a record high.
China's policy stimulus has already shown initial results - in September last year, the People's Bank of China lowered the reserve requirement ratio for banks, cut mortgage rates, and increased support for the stock market; in March this year, the government launched a "special action plan" including wage increases and child care subsidies; the trade-in program (encouraging product upgrades through fiscal incentives) also supported consumer spending. However, China's economy still requires further stimulus. To achieve continuous, long-term growth in consumer spending, it is necessary to continuously boost household confidence and significantly reduce the savings rate.
Caption: Retail sector stocks are supported by stimulus measures. The figure shows the change in the NASDAQ China Consumer Staples Index (July 2024 to present) from Financial Times.
However, China's long-term focus on production, rather than consumption, has led analysts to doubt whether households can play a larger role in its economy. This mainly faces three upward structural risks: reform, urbanization, and demographics. At present, the importance of boosting consumption has gained political support, which aligns with the concepts of "dual circulation" (strengthening domestic and international demand) and "common prosperity" (reducing inequality).
Meanwhile, Donald Trump's tariff policies have further pressured China's policymakers, highlighting the importance of domestic markets amidst fluctuations in external demand.
Jason McMann, director of political intelligence at Morning Consult, said: "After years of tense trade relations with countries like the EU and Australia, China might now be able to enhance its global standing by taking a softer stance on trade issues. However, on the other side, the U.S. will likely remain tough on trade issues."
Caption: In today's global arena, China is more popular than the U.S. The figure shows changes in the global average net favorability ratings for the U.S. and China, with deep blue representing the U.S. and light blue representing China. From Financial Times.
Urbanization is another potential利好 factor for China's economy. Two-thirds of China's population resides in cities, while the average urban population ratio in OECD countries exceeds 80%. Continued and faster urban migration will increase income and service expenditures.
According to Rhodium Group's assessment, comprehensive opening up of basic urban services will significantly promote consumption. A study in 2025 found that after migrants move to cities, their per capita consumption increases by 30%; and when they fully integrate into urban life, per capita consumption increases by another 30%.
More specifically, even in "capitalist-oriented" America, social transfer payments are higher than in China. China's income tax revenue accounts for only about 1% of its GDP, far below developed economies.
In addition, aging populations may bring long-term economic boosts. As the proportion of retirees in China rises, the ratio of savers to consumers will decline.
Left caption: Narrowing the urban-rural service gap will promote consumer spending. Deep blue represents the urban population ratio, and light blue represents the urban registered population ratio. Right caption: China spends far less on family social welfare compared to developed countries. The figure shows expenditures on family social welfare (deep blue: cash, light blue: physical goods) for various countries from Financial Times.
Rory Green noted: "In East Asia, the high savings pattern among working-age populations is particularly strong." In fact, South Korea and Japan have also experienced peaks in savings rates when the proportion of working-age population reaches its peak. Rory Green believes that compared to other Asian countries, China's population pyramid structure is more uneven, potentially leading to a faster decline in its savings rate. "Even if policy reforms fail, China's savings rate will decline," he stated in a recent report.
Caption: China's demographic trajectory may lead to lower savings. Light blue represents the dependency ratio, deep blue represents the domestic savings total as a percentage of GDP, and the dashed line represents the forecasted dependency ratio from Financial Times.
Currently, China's emphasis on "new quality productivity" plays a significant role in boosting employment and income. However, Michael Pettis, a senior researcher at the Carnegie Endowment for International Peace, pointed out that relying solely on this strategy to stimulate consumption has certain limitations.
Creating the required productivity growth and ensuring that these gains primarily benefit workers is undoubtedly a daunting task. In fact, according to BCA Research data, China's capital expenditure efficiency has been declining.
"This leads to overcapacity, deflation, and numerous loss-making enterprises," said Michael Pettis. Other sustainable solutions to raise household income will require major policy reforms (which China has hesitated to undertake so far). "China could transfer local government revenues, especially to poorer, more indebted families. Alternatively, it could strengthen the social security system."
Continuing to shift toward high-value-added production may sustain economic growth, but this requires more targeted investments. If the Chinese government genuinely wants to make China a "moderately developed country" by 2035, it needs to unleash the potential of its vast consumer base.
Caption: Slowing growth from investments increases consumption risks. The figure shows the contribution of capital stock growth to actual GDP growth (percentage points) from Financial Times.
Although short-term stimulus plans may provide some help, they are not significant in enhancing long-term household confidence. Welfare (and tax) reforms can convert high savings into real economic expenditures, thereby promoting urbanization and ultimately helping build China's mature and innovative retail ecosystem.
It is worth noting that policymakers are increasingly focusing on consumption, and are gradually advancing small-scale reforms in household registration, pensions, and welfare systems. As the economic and geopolitical limitations of China's existing growth strategy become increasingly apparent, the Chinese government can utilize its centralized policy tools to stimulate consumer spending.
David Goldman, director of the China Research Center at the University of Sydney, an expert who has studied China for over 50 years, said: "Time and again, China has demonstrated its ability to achieve its long-term goals in unexpected ways."
It cannot be denied that Chinese consumers have faced difficulties in recent years. But it is equally undeniable that China's enormous consumer potential remains untapped, and China itself holds the key to unlocking this potential.
(The original article was published on the Financial Times website, with the title: Don't Underestimate Chinese Consumers. The translation is provided for reader reference only and does not represent the views of Observer Network.)
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