China must boost consumption, but doubts grow over Xi’s ability to pull it off

China’s economic plan has hit a wall, and now the government wants households to carry the weight. For years, Beijing leaned on exports and state-led investment to fuel growth.

But with that model losing steam, President Xi Jinping is looking inward — at a population that’s hesitant to spend and quick to save. And while the call to increase consumer demand has grown louder, nobody’s really sure if Xi can make that happen.

According to the Financial Times, there are questions about whether Beijing’s top-down approach can unlock the massive spending power that’s been sitting idle for years.

The size of China’s consumer market is massive — the second largest globally after the U.S. — but that doesn’t mean people are buying enough. Right now, consumer spending makes up only 40% of the country’s economy, far below the 60% seen in other countries. 

Before the pandemic, it was growing at a 9% annual pace. Still, confidence hasn’t returned. People are anxious. A collapsed housing sector and the scars from the zero-Covid strategy have pushed families to save more and spend less.

Big economy, small confidence

Retail sales inside China are ten times bigger than exports to the U.S., but that hasn’t translated into strong domestic demand. Rory Green, chief China economist at TS Lombard, said, “China is the largest market in terms of volume and value for almost any consumer product, ranging from vehicles and smartphones to luxury goods and cinema.”

Even with economic pressure, younger Chinese aren’t shying away. Keyu Jin, an economist at Hong Kong University of Science and Technology, said Gen Z and millennials are still buying. “Gen Z and millennials are still eagerly spending on travel, outdoor experiences and gaming,” she explained. “The bulk of consumer credit goes to people under 35. With one click on Alibaba, you can borrow to buy a lipstick.”

Boston Consulting Group predicts China’s middle- and upper-class population will grow to over 500 million by 2030. That’s more than the entire population of the United States. But even that won’t matter if people don’t feel safe spending. The government needs people to trust that a fall won’t bankrupt them — and right now, that trust isn’t there.

Policy changes haven’t been enough

Some small fixes have landed. The People’s Bank of China lowered bank reserve requirements in September. Mortgage rates were also cut, and stock markets got a bit of support. In March, Beijing rolled out a “special action plan” with promises like wage increases and childcare subsidies. There’s also a trade-in plan offering cash to replace old goods with new ones.

It’s a start, but not enough. A Deutsche Bank survey in Q1 found that 52% of Chinese consumers said they were ready to spend more, the highest figure in a year. But any real, lasting shift would require deeper reforms. Households aren’t going to drain their savings until they feel protected. That means better welfare, healthcare access, and pension systems — things China doesn’t have in place right now.

Xi’s signature slogans — “dual circulation” and “common prosperity” — are supposed to shift the focus toward domestic growth and less inequality. But slogans don’t fix broken systems.

The government’s heavy hand in production has led to too many factories and not enough healthy demand. BCA Research noted that China’s capital spending is now inefficient, creating deflation and too many unprofitable businesses.

Urban growth, aging population, and the tax problem

Urbanization might help. About two-thirds of the population lives in cities. In developed countries, it’s closer to 80%. Getting more rural residents into urban jobs and services could help boost spending. But the hukou system — China’s residency permit rules — blocks rural migrants from accessing city benefits. Rhodium Group found that when migrants are fully integrated into city life, their spending jumps by 60%.

China’s welfare system is also far behind. It only collects about 1% of GDP from income taxes — way below international standards. Even the United States, a capitalist state, spends more on social programs. Beijing doesn’t want to lean into “welfarism,” as Xi puts it.

Aging might actually help though. As more people retire, fewer will be saving, and that could shift money into the economy. Rory said countries like Japan and South Korea hit peak savings when their working-age populations topped out. “Even if policy reforms are ineffective, China is going to save less,” he said.

Xi has also been pushing “new quality productive forces” — a phrase nobody outside China uses — to describe the change toward high-end manufacturing. But boosting productivity doesn’t guarantee more consumer demand, especially when workers don’t feel the benefit.

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