Analysis: What’s Behind China’s Urgent Consumption Problem

China's low household consumption-to-GDP ratio has long been recognized by economists and policymakers as a fundamental limitation on its economic development. At the Central Economic Work Conference in late 2024, China's leaders made boosting domestic consumption their top priority for the foreseeable future, emphasizing the need to accurately measure and understand the true level of household consumption in the country. This assessment is vital for shaping effective policies to drive economic growth through greater domestic demand.[para. 1][para. 2]

Recent research has challenged the conventional view, arguing that China's actual consumption has been systematically underestimated. When evaluating per capita real consumption volumes, the gap between China and developed countries like the U.S., Japan, and Germany is significantly smaller than it appears in monetary terms. This research is well-supported with solid data and indicates that the difference in actual living standards may be less than previously assumed. However, it only partially addresses the complex reality, as it does not negate substantive differences in the consumption-to-GDP ratios—an important economic indicator.[para. 3][para. 4]

The value-based consumption-to-GDP ratio more accurately represents the central role of consumption in the national economy, as household consumption both initiates and sustains the economic cycle. Increased household consumption amplifies market demand, triggers investments in technology and equipment, and establishes a virtuous cycle, driving employment and income growth, which in turn fuels further consumption.[para. 5][para. 6]

Extensive research shows two main factors behind China’s low household consumption ratio: the low share of household income in national income distribution and a low average propensity to consume. A smaller portion of national income flowing to households weakens consumption as an economic driver. Notably, China’s average household consumption propensity lags significantly behind that of the U.S., Japan, or South Korea—by about 10 to 15 percentage points. The propensity to spend declined acutely following the pandemic, reinforcing traditional saving behaviors and risk aversion, and it slipped again after a temporary recovery in 2021. Major contributors to this trend include worries about unpredictable health care and retirement expenses, compounded by a weak property and job market.[para. 7][para. 8][para. 9][para. 10]

To promote greater consumption, simply increasing household income is insufficient. China must also ensure its industrial structure evolves to match the changing direction of consumer demand. Research based on 2020 input-output tables reveals stark structural differences: only about 56.7% of China’s household consumption is directed toward services, much less than in the U.S., Germany, and Japan. Chinese consumers still primarily spend on goods, showing a need for structural transformation toward more service-oriented consumption. Interestingly, even developed countries with manufacturing-based growth models, such as Germany, Japan, and South Korea, have transitioned to more service-centric household consumption.[para. 11][para. 13]

Addressing China’s low consumption ratio is urgent for invigorating the economy. Policymakers should prioritize supply-side reform and improving service quality, particularly in health care, education, and cultural sectors, while also encouraging high-end manufacturing. If these steps are taken, China can better align supply with evolving consumer demand, achieving the dynamic, balanced economic growth now seen in more advanced economies.[para. 14][para. 15]