The myth of Chinese consumption stimulus

I’ve just returned from a three-week family holiday in China – my third visit since the country reopened post-pandemic. Although it was meant to be a break from work, my instincts as a fund manager led me to conduct informal primary research wherever possible.

We’ve been inundated with weak prints on the Chinese economy. The economy has been in deflation for several quarters, and consumer confidence readings continue to be weak.[1]

The underlying causes are well known. A prolonged property downturn has damaged household balance sheets and dampened sentiment. People are reluctant to spend. Instead, they save at unprecedented levels. Household deposits rose by RMB 15 trillion and RMB 18 trillion ($2 trillion and $2.5 trillion), equivalent to 11.6% and 13.3% of GDP, in 2023 and 2024 respectively. In the first half of 2025, another RMB 10 trillion (US$1.4 trillion) was added.[2] 

Are consumers really struggling?

Yet, walking through various cities in China, I saw no signs of distress. Streets were bustling with traffic and commercial activity. While people voiced concerns about the macro environment, their spending seemed largely unaffected.

Despite falling property values, substantial savings mean household finances remain healthy. The question is whether consumers are willing to draw down savings. It largely depends on the wealth effect. An ailing property sector led to a negative wealth effect, meaning consumers held back. The capital market now has the potential of becoming the next avenue for wealth creation. 

We often hear about how weak employment and income prospects negatively impacted consumption. However, despite headlines on salary cuts and bonus clawbacks, disposable income per capita still grew at 6% p.a. after the pandemic. Private consumption also grew at 6% p.a. since COVID. Although it is below the pre-COVID five-year average of 10%, it still outpaces most global economies.

Admittedly, demographic shifts are reshaping consumption patterns. The pursuit of new experiences has driven growth in sectors such as tourism, pet supplies, fresh-made beverages and pop toys. In contrast, sectors reliant on population growth and household formation – such as property and consumer staples – are shrinking or struggling with declining profitability. Consumer sectors are in transition: the ‘old’ is consolidating, while the ‘new’ is still emerging. Chinese consumers are still spending, but the winners and losers have changed.

Why government may not step up consumption stimulus

Investors continue to argue that demand-side stimulus is needed to solve China’s economic problems. To many, it is disappointing to see that fiscal expansion since September 2024 has largely focused on resolving local government debt and replenishing municipal funds.

Would the government want to further stimulate demand, in addition to trade-in subsidies? The subsidies were designed to be limited in scale, aiming to provide a downside cushion rather than boost growth. They mainly target specific industries such as electric vehicles, home appliances and consumer electronics, reinforcing manufacturing as the economy’s backbone. Childcare subsidies are intended to address demographic challenges. 

In essence, consumption support announced thus far tends to align with a long-term strategic agenda rather than short-term stimulus. 

In the meantime, despite disruptions from US tariffs, external demand remains robust. Strong demand from other markets has offset losses in direct US-China trade. With emerging market demand providing a potential a long-term tailwind for Chinese exports, there is little urgency for the government to boost domestic demand. 

The household consumption question

Should the government worry about share of household consumption in GDP, which hovers around 40%, significantly lower than global average of 56%? 

As an FT article pointed out, “the reason for this anomaly is not that consumption has grown slowly, it is that the other big component of GDP, investment… has grown even faster… Corrected for this long-term pattern of over-investment, the consumption share of China’s GDP would be around 55%.”[3] 

In addition, abundant and affordable goods and services keep living costs very low in China. Minimal real income tax rates, government subsidies for utilities and basic services (such as healthcare and education) also contribute to the low proportion of consumption. Although support is needed for the time being, China's long-term ambition to achieve self-sufficiency and to be the world's manufacturing powerhouse remains unchanged. China may never want to become a consumption-led economy like the US or India.

In a changing landscape, it may pay to be selective

In summary, consumption is not the root challenge for China’s economy. Boosting consumption is also unlikely to spark another economic miracle. 

Rising wealth effect and benefits from anti-involution campaigns[4] might support consumption recovery. However, we believe the government will keep its cautious stance on further demand stimulus. 

The consumer space is changing, and we believe this lends weight to the argument that active stock picking is needed to identify long-term winners. 

 
[1] Source: China Consumer Confidence
[2] Source: https://www.bruegel.org/analysis/chinese-economy-stimulus-without-rebalancing
[3] Source: https://www.ft.com/content/bf1e8755-de42-4ef3-97bf-1215d8bf894e?shareType=nongift 
[4] ‘Anti-involution’ refers to economic policies that aim to curb excessive competition and overcapacity in industries to promote sustainable growth and profitability