Commentary: How China Can Unlock Consumer Spending to Secure Its Economic Future

China's ongoing economic structural transformation is marked by a persistent focus on boosting supply rather than stimulating demand, despite national goals to promote consumption and improve people’s livelihoods. Core bottlenecks to sustainable growth are now weak domestic consumption and inequitable income distribution, which undermine economic resilience and the potential for endogenous growth[para. 1].

The government’s transition strategy has emphasized investment-driven growth, channeling significant funds toward infrastructure, state-owned enterprises (SOEs), and export incentives. This has led to a pronounced “strong supply, weak demand” imbalance: investment in transportation, energy, and water conservancy outpaces consumption growth, ultimately increasing risks of overcapacity and excessive dependence on government expenditure, while reducing adaptability to global economic shocks[para. 2][para. 3].

Large subsidies for SOEs have supported technological upgrades and green initiatives, yet relatively little has been allocated to direct household transfer payments. This skews benefits toward corporate expansion, failing to raise disposable income for residents or stimulate household spending power, further decoupling industrial growth from improvements in public well-being[para. 4]. Export incentives like tax rebates are far larger than household subsidies, fostering foreign trade but exposing the economy to external fluctuations such as shrinking demand and trade tensions, while neglecting domestic consumption potential[para. 5].

The root problems are weak consumption amid uneven income distribution, limited social security, and a lack of appealing consumption scenarios. In 2023, consumption contributed 65.1% of China’s GDP—significant but still behind the U.S. (≈80%) and India (70%). This shortfall originates from structural factors, including social safety net inadequacies and underdeveloped consumer credit, dampening consumer confidence and spending power[para. 6].

Chinese consumers face a “triple-lack” dilemma: not enough attractive spending scenarios (physical store vacancy rate hit 15.3%, and urban amenities lag in supporting new consumer trends), low confidence due to high precautionary savings (household savings rate at 43.4%) driven by job insecurity and rising living costs, and constrained spending power (median income grew 5.1% in 2024, but high income inequality means consumption gains are limited for most households). Low-income households have a high propensity to consume but lack sufficient income growth[para. 7][para. 8][para. 9][para. 10].

As a result, returns on investment are declining, with industrial capacity utilization at just 76.2% at the end of 2024. Overinvestment in traditional industries like steel and cement coexists with supply shortages in critical sectors like healthcare and education, revealing structural imbalances[para. 11].

To overcome these challenges, China is urged to reform on four fronts: fiscal policy, industrial transformation, population policy, and urban-rural integration[para. 12]. Fiscal reform should rebalance support toward households by increasing transfer payments, expanding education and healthcare spending—potentially reaching 5% and 6% of government expenditure, respectively—and reducing subsidies to production[para. 13][para. 14][para. 15].

Industrial transformation must target consumption alignment and quality upgrades by promoting domestic sales of high-tech products and integrating manufacturing with services[para. 16][para. 17][para. 18]. Demographic policy adjustments—such as subsidizing families with more children and reducing social security burdens for young couples—are needed to boost family-oriented consumption, especially given China’s low fertility rate (1.09) and high child-rearing costs[para. 19][para. 20].

Urban-rural integration should relax residency restrictions, improve protections for migrant workers, and cut rural logistics costs, unlocking massive untapped rural demand and easing the consumption disparity between urban and rural areas[para. 21][para. 22].

Ultimately, a virtuous cycle of rising income, confident spending, innovative consumption scenarios, and robust social support is required to achieve sustainable consumption-led growth[para. 23][para. 24][para. 25]. Aligning supply and demand will help China move from quantity-driven (scale) to quality-focused development, enhancing risk resilience and ensuring shared benefits from economic modernization[para. 26][para. 27].