China’s Tough Road to Consumer-Led Growth
As Beijing calls for more consumption, policy still rewards investment, overcapacity, and control.
When Premier Li Qiang told the “Summer Davos” crowd in Tianjin on June 25 that China can maintain “relatively rapid” growth while moving from investment toward consumer spending, the applause drowned out a harsher reality. The ongoing real-estate crash has devastated land values, the source of revenue for most local governments' budgets. Land-sale income, down nearly 12% in the first five months of 2025, already comes off the back of years of decline and is the fiscal lifeblood for city and county governments that together bankroll China’s investment-based economy. Strip away that revenue, and the same municipalities must throttle the very spending that has long been the driver of China’s GDP growth. China’s model thus sits in a feedback loop: a property slump hollows out local coffers, shrinking investment, which in turn suppresses incomes and confidence, making it even harder for households to power the economy on their own.
Household spending equaled just 39% of GDP in 2024, 20 points below the OECD median and barely higher than in 2010. A World Bank review reaches the same conclusion, warning that “structurally low consumption” is now the core drag on growth. Retail sales are rebounding, but service-sector Purchasing Managers Index (PMI) readings have spent most of 2025 in contraction territory. While it is true that even low-to-mid-single-digit growth still adds billions in absolute yuan, if Beijing hopes to hit 5% growth without another infrastructure splurge, consumption’s share must rise meaningfully and not just in level terms. That has not happened since the mid-2000s investment boom pushed the ratio down in the first place.
Chinese families have long treated apartments as their pension fund, college fund, and rainy-day buffer rolled into one. Roughly 70% of household wealth is tied up in property. For comparison, property accounts for about 28% of U.S. household net worth, 40% in the United Kingdom, and a little over two-thirds across the euro area on average. New-home prices have fallen 30% from their 2021 peak; pockets of oversupply mean millions of units will never be sold or keys handed over. Mortgage boycotts and “black-swan” developer defaults have shredded faith in bricks and mortar as a store of value.
China’s consumers are battening down the hatches. Household savings are more than 40% of GDP, and flows into Alipay’s Yu’e Bao money-market fund keep climbing even after its yields dipped below 1.5%. The same recessionary signals show up in the labor market: youth unemployment is still stuck around 15%, eroding confidence in near-term wage growth. Surveys echo the hard data with over half of respondents now saying they would rather stash away cash than spend, the highest share on record. Together, the elevated saving rate, Yu’e Bao’s popularity, stubborn youth joblessness, and bleak sentiment polls sketch a public that is preparing for leaner times, not a consumption rebound.
Turning savers back into spenders would take a jolt of confidence that their future income and social safety nets are secure. But China’s fiscal plumbing runs in the opposite direction.
Any successful consumption pivot elsewhere rested on large, centrally funded transfers. China’s tax system is almost the mirror image: the central government keeps the revenue while locals shoulder most social service bills. Municipalities plug that mismatch by selling land to developers, a model now broken. Land sales by China's local governments faced a “double-digit year-on-year contraction of 11.9% in the first five months,” leaving city halls scrambling to pay teachers or local government workers, let alone expand unemployment insurance or healthcare coverage.
Beijing could raise its own fiscal deficit or even sell off SOEs to raise revenue, then redistribute the windfall to households. Either path would swell headline debt or slow the SOE investment machine that, fueled by cheap credit and growth targets, keeps building plants faster than domestic demand can absorb their output. What you get is overcapacity. Steel mills, solar panel production, and EV factories capable of producing several times what China can consume. To keep utilization and GDP alive, China must dump the surplus abroad, which creates trade friction. The result is policy drift: modest consumer coupons here, a small-print tax break there, none large enough to reverse the structural tilt toward saving.
Every quarter, the People’s Bank of China trumpets new relending windows to support consumption. Scratch the surface and most money lands in supply-side pockets. Examples include automotive trade-ins for electric-vehicle makers, appliance subsidies that double as industrial policy sweeteners, or Real Estate Investment Trusts (REITs) designed to bail out developers rather than buyers. SOEs and politically connected private champions capture the lion’s share of bank loans, while credit-card balances remain a rounding error in total social financing. Markets obey incentives: if capital is cheaper for a robot-filled export plant than for a start-up coffee chain, investment will stay the growth driver.
Even if policymakers mailed every adult a spending voucher tomorrow, the outcome would disappoint. A yuan spent in high-end manufacturing or digital infrastructure still generates more value added than a yuan spent on hot-pot or staycations. Unless Beijing liberalizes manufacturing, a bigger consumption slice will simply yield slower aggregate growth.
Technocrats know what a real pivot requires: raise the labor share of income, dismantle SOE monopolies, tax reforms and a re-engineering of the financial relationship between the central and provincial governments, grant full hukou rights to migrant workers, privatize chunks of state assets, and tolerate an interim drop in headline growth while overcapacity clears. Each move strikes at a vested interest: local cadres, state-sector bosses, or the Party’s own grip on the commanding heights. Faced with that trade-off, Beijing has repeatedly opted for directed credit and mini-stimuli that keep the investment engine idling but leave consumers in the passenger seat.
Xi Jinping’s “new productive forces” campaign explicitly favors technology-intensive manufacturing. As Xinhua puts it, these forces are “high technology, high efficiency, and high quality” industries — deployed to “break away from the traditional…productivity development path.” Behind the rhetoric lies a clear preference hierarchy. Instead of redistributing toward households, China is doubling down on advanced manufacturing to outcompete the West and fortify national security. The resulting supply overcapacity is already reigniting trade frictions and reinforcing an external surplus that masks domestic demand weakness.
China’s 1.4 billion consumers will, of course, spend more yuan every year simply because their numbers are vast and nominal incomes still rise. But consumption cannot shoulder the growth mantle unless the structural brakes of asset deflation, aging, welfare gaps, investment-biased fiscal rules, and sub-par services productivity are released. That would entail a politically explosive redistribution of wealth and power away from the state sector. Signals from Zhongnanhai suggest little to no appetite for that leap.
The political calculus is straightforward: an investment-driven model, with support from high exports, keeps power, money, and promotions anchored inside the state apparatus. Cadres rise by shepherding large projects, not by nudging up retail foot traffic, and SOEs depend on that pipeline for orders, cheap credit, and relevance. Rebalancing toward households would reroute capital into smaller, harder-to-monitor service firms and dilute the land-finance gravy train that underwrites local budgets. In effect, Beijing would be asking officials, banks, and SOE managers to surrender the very levers that secure their influence and then to accept a spell of slower, messier growth while new engines spin up. Few patrons volunteer for marginalization.
Ideology reinforces the inertia. Since 2020, virtually every major policy document has folded economic goals into a “comprehensive national security” frame that prizes self-reliance in critical technologies over consumer comfort. Advanced manufacturing, electric-vehicle supply chains, and semiconductor fabs are cast as bulwarks against foreign pressure; restaurants and daycare centers are not. Moving resources to consumers would require steering capital away from these favored projects, loosening the Party’s tight hand on allocation, and weathering the disruptive churn that freer markets bring; all after an expensive, politically fraught transition. The leadership may want fuller malls, yet the system it has built still rewards humming factory floors over swarming food courts or flashy new cars.
The views and information contained in this article are the author’s own and do not necessarily represent those of The Asia Cable.