The Chinese government has announced new child care subsidies, higher wages, and better paid leave to boost the economy. Additionally, it has introduced a $41 billion discount program covering items like dishwashers, home decor, electric vehicles, and smartwatches.

Encouraging Consumer Spending

Beijing is urging citizens to spend more. However, consumer spending remains low.

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Notably, official data on Monday showed retail sales grew by 4% in the first two months of 2025. While this is a positive sign, home prices continued to decline compared to last year, except in a few areas like Shanghai.

The Challenge of Deflation

Unlike the US and other major economies dealing with inflation, China faces deflation. Prices have fallen for 18 months straight over the past two years. At first glance, falling prices may seem beneficial for consumers. However, they signal deeper economic problems. When people spend less, businesses lower prices. This leads to lower profits, reduced hiring, stagnant wages, and an economic slowdown.

China aims to avoid this cycle. The country already struggles with slow growth, a prolonged property crisis, high government debt, and unemployment.

Why People Aren’t Spending

The reason for low spending is clear: Chinese consumers either lack money or feel uncertain about their financial future.

This issue is critical as China targets 5% economic growth in 2025. President Xi Jinping hopes domestic consumption will offset the impact of US tariffs on Chinese exports.

Beijing’s Plan to Boost Spending

To revive demand, China’s annual National People’s Congress announced more investment in social welfare programs. This week, the government promised employment support but provided few details.

Some experts welcome these moves but argue China must do more. The government acknowledges the need for higher wages, a stronger safety net, and policies that encourage spending.

A quarter of China’s workforce consists of low-paid migrant workers without full access to urban social benefits. They are especially vulnerable during economic downturns.

In the 2010s, wages grew by 10% annually, masking some problems. But as wage growth slowed in the 2020s, saving became essential.

Currently, the government has focused on short-term solutions, such as trade-in programs for appliances. However, Gerard DiPippo, a researcher at the Rand think tank, warns this approach ignores a deeper issue: “Household incomes are lower, and savings are higher.”

The Struggling Property Market

The struggling property market has made consumers more cautious, further reducing spending.

“The property market matters not only for real economic activity but also for household sentiment,” DiPippo says. “I don’t think China’s consumption will fully recover until it’s clear that the property sector has bottomed out.”

Some analysts see hope in Beijing’s efforts to address long-term issues like low birth rates. More young couples are choosing not to have children due to high costs.

A 2024 study by the Chinese think tank YuWa found that raising a child in China costs 6.8 times the country’s GDP per capita—one of the highest in the world. In comparison, the cost is 4.1 times GDP per capita in the US, 4.3 in Japan, and 3.6 in Germany.

A Culture of Saving

These financial pressures have reinforced a culture of saving. Despite economic struggles, Chinese households saved 32% of their disposable income in 2024.

China’s consumer spending has never been very high. While consumption drives over 80% of growth in the US and UK and about 70% in India, China’s share has remained between 50% and 55% over the past decade.

A Shift in Consumer Habits

Chinese shoppers once joked about their love for e-commerce deals, calling themselves “hand-choppers”—implying they needed to chop off their hands to stop spending.

During the 2010s, rising incomes fueled spending. Double 11 (November 11) became the world’s biggest shopping event. In 2019, it generated over 410 billion yuan ($57 billion) in just 24 hours.

However, recent shopping festivals have seen a sharp decline. “If anything, it caused more trouble than it was worth,” a Beijing-based coffee bean seller told the BBC.

Since the pandemic, Chinese consumers have become more cautious. Even after restrictions ended in 2022, spending remained low.

Alibaba and JD.com stopped publishing sales figures that year. A source told the agency that Chinese authorities warned against releasing data, fearing poor numbers would further weaken consumer confidence.

Luxury brands have also suffered. In 2024, LVMH, Burberry, and Richemont reported declining sales in China, once a key luxury market.

On the Chinese social media app RedNote, posts tagged “consumption downgrade” have received over a billion views. Users share tips on saving money. One wrote, “Tiger Balm is the new coffee.” Another said, “I apply perfume between my nose and lips now—saving it just for myself.”

Declining Export Demand

Even during China’s consumer boom, exports played a bigger role in economic growth. The government invested heavily in infrastructure and relied on low-wage labor and high household savings.

Now, geopolitical tensions have led other nations to shift supply chains away from China, reducing export demand. Additionally, local governments face heavy debt from years of infrastructure investments.

The Challenge of Changing Consumer Behavior

Xi Jinping has pledged to “make domestic demand the main driving force and stabilizing anchor of growth.” National People’s Congress representative Caiyun Wang noted, “With a population of 1.4 billion, even a 1% rise in demand creates a market of 14 million people.”

However, Beijing faces challenges in shifting to a consumer-driven economy. Analysts say China must restore confidence among young workers struggling to afford homes and find jobs. It would also require a cultural shift from saving to spending.

“China’s extraordinarily low consumption level is not an accident,” says Michael Pettis, a senior fellow at the Carnegie Endowment for International Peace. “It is fundamental to the country’s economic growth model. Changing this won’t be easy.”

The State vs. the Consumer

In China’s state-controlled system, household savings fund key industries, including AI and advanced technology. Analysts believe the government may not want a fully consumer-driven economy.

“One way to think about this is that Beijing’s primary goal is not to enhance the welfare of Chinese households, but rather the welfare of the Chinese nation,” wrote David Lubin, a research fellow at Chatham House.

Shifting power from the state to individuals may not align with Beijing’s strategy. In the past, China’s leaders opened up trade, encouraged businesses, and invited foreign investment, transforming the economy. The question now is whether Xi Jinping will take a similar approach again.