Why is China spending billions to get people to open their wallets?

To stimulate economic recovery, the Chinese government has pledged to introduce new childcare subsidies, raise wages, and improve paid leave systems. Furthermore, a discount program totaling $41 billion will be implemented, covering a variety of goods such as dishwashers, home decor, electric vehicles, and smartwatches.

Beijing is actively taking measures to stimulate consumption, encouraging the public to increase consumer spending. Currently, insufficient domestic consumption expenditure in China poses a major challenge to economic development. This proactive approach is crucial for boosting economic vitality and ensuring sustainable growth.

Recent data shows a 4% increase in retail sales for the first two months of 2025, bringing positive signals to consumption data. However, new and existing home prices continue to decline compared to the same period last year, except for a few cities like Shanghai. The contrasting trends highlight the complex dynamics within the Chinese economy.

Unlike the post-pandemic inflation faced by the United States and other major economies, China is experiencing deflation, where inflation rates fall below zero and prices decline. China's prices have fallen for 18 consecutive months over the past two years. This deflationary pressure presents unique challenges for policymakers.

Falling prices may seem beneficial to consumers, but sustained declines in consumption indicate deeper economic problems. When people stop spending, businesses lower prices to attract buyers. This situation escalates, reducing corporate profits, slowing hiring, stagnating wages, and weakening economic momentum. China is striving to avoid this vicious cycle, as it already faces a long-term crisis in the real estate market, high government debt, and rising unemployment. Addressing these interconnected issues is crucial for preventing further economic deterioration.

The reason for weak consumption is simple: Chinese consumers either do not have enough money or lack confidence in the future and are unwilling to spend. With an economic growth target of 5%, boosting consumption has become a top priority for Chinese President Xi Jinping, who hopes that the growth in domestic consumption can offset the impact of US tariffs on Chinese exports. This strategic shift towards domestic demand is essential for mitigating external economic pressures.

To address the weak economy and domestic demand, Beijing announced at the National People's Congress that it would increase investment in social welfare programs as part of its grand economic plan for 2025. This was followed by an even greater commitment this week, such as employment support programs, but details remain unclear. The focus on social welfare aims to provide a safety net and encourage spending.

Some consider this a welcome move, but also point out that Chinese leaders need to increase their support. This indicates that Beijing has realized that building a stronger Chinese consumer market requires higher wages, a stronger social security system, and policies that make people feel safe and willing to consume rather than save. A comprehensive approach is necessary to foster a robust consumer-driven economy.

A quarter of China's labor force are low-income migrant workers who cannot fully enjoy urban social benefits. This makes them particularly vulnerable during times of economic instability, such as the COVID-19 pandemic. Wage increases in the 2010s masked some of the problems, when average income grew by about 10% per year. But as wage growth slowed in the 2020s, savings once again became a lifeline.

However, the Chinese government has been slow to expand social welfare, instead focusing on short-term measures to stimulate consumption, such as trade-in programs for household appliances and electronics. Gerard DiPippo, a senior researcher at the RAND Corporation, said that this does not address the fundamental problem: "Household income is low and savings are high." A long-term solution requires addressing income disparities and bolstering social safety nets.

The near collapse of the real estate market has also made Chinese consumers more risk-averse, leading them to reduce consumption. DiPippo said: "The real estate market is not only critical to actual economic activity, but also to household sentiment, as Chinese families invest most of their wealth in housing. I think China's consumption can only fully recover when the real estate market clearly bottoms out and the main assets of many families begin to recover." Restoring confidence in the housing market is essential for reviving consumer spending.

Some analysts are encouraged that Beijing is seriously addressing long-term challenges such as the declining birth rate, as more and more young couples are choosing to forgo having children due to the high cost of raising them. A 2024 study released by the Chinese think tank Yuwa Population Research estimated that the cost of raising a child to adulthood in China is 6.8 times the country's per capita GDP, ranking among the highest in the world, compared to 4.1 times in the United States, 4.3 times in Japan, and 3.6 times in Germany. Addressing the financial burdens of raising children is crucial for reversing the declining birth rate.

These economic pressures further solidify a deeply ingrained culture of saving. Even in difficult economic times, Chinese families still managed to save 32% of their disposable income in 2024. This is not surprising in China, as consumption levels have never been high. In contrast, domestic consumption drives more than 80% of economic growth in the United States and the United Kingdom, and about 70% in India. In China, this proportion has typically been between 50% and 55% over the past decade. Shifting cultural norms towards greater consumption will require significant policy changes.

In the past, Chinese shoppers jokingly referred to themselves as "centipede hands" to describe the irresistible temptation of e-commerce promotions, saying that only chopping off their hands could stop them from clicking the checkout button. As income growth boosted their spending power, China's "Singles' Day" shopping festival became the world's busiest shopping day. In 2019, sales in just 24 hours exceeded 410 billion yuan (US$57 billion; £44 billion). This illustrates the potential for consumer spending when economic conditions are favorable.

But a Beijing-based online coffee bean seller told the BBC that last year's "Singles' Day" shopping festival was "disappointing" and even "more harm than good." Since the pandemic, Chinese consumers have become more cautious in their spending, and this caution has persisted even after restrictions were lifted at the end of 2022. That year, Alibaba and JD.com stopped publishing their sales figures, a major shift for companies that once made headlines with record revenues. A person familiar with the matter told the BBC that Chinese authorities warned platforms not to publish data, fearing that unfavorable results could further dampen consumer confidence. The reluctance to share data reflects the sensitivity surrounding consumer sentiment.

The consumption squeeze has even affected high-end brands. Last year, LVMH, Burberry and Richemont all reported declines in sales in China, which was once a pillar of the global luxury market. The decline in luxury sales underscores the broader trend of reduced consumer spending.

On the Chinese social media app Xiaohongshu, posts with the tag "consumption downgrade" have garnered more than 1 billion views in recent months. Users are exchanging tips on how to replace expensive goods with affordable alternatives. "Tiger Balm is the new coffee," one user said, while another joked: "I now put perfume between my nose and lips - just to save for myself." These anecdotes highlight the shift towards more frugal spending habits.

Even at its peak, China's consumption boom never matched exports. Trade is also why the country has heavily invested in highways, ports and economic zones. China has relied on low-wage workers and high household savings to drive economic growth, but this has left consumers with limited disposable income. The traditional growth model has prioritized exports and investment over domestic consumption.

But now, as geopolitical uncertainties increase, countries are shifting supply chains out of China, reducing reliance on Chinese exports. Local governments are also heavily indebted, as they have borrowed heavily for investment over the years, especially in infrastructure. The changing global landscape necessitates a shift towards a more balanced and sustainable economic model.

Xi Jinping has vowed to "make domestic demand the main engine of growth and a stabilizer." Wang Caiyun, a representative of the National People's Congress, said: "China has a population of 1.4 billion, and even if demand grows by 1%, it can create a market of 14 million people." The sheer size of the Chinese market presents a significant opportunity for boosting domestic consumption.

However, there is a problem with Beijing's plan. Many analysts say that in order for consumption to drive economic growth, the Chinese Communist Party must restore the consumer confidence of a generation affected by the epidemic, a generation that is struggling to own a home or find a job. In addition, it is necessary to trigger a cultural shift from saving to consumption. Rebuilding trust and fostering a consumer-friendly environment are crucial for success.

Michael Pettis, a senior fellow at the Carnegie Endowment for International Peace, said: "China's extremely low level of consumption is no accident. It is the foundation of the country's economic growth model, around which China has developed political, financial, legal and business institutions over the past three or four decades. It's not easy to change that." The deeply ingrained economic structure presents a significant challenge to shifting towards a consumption-driven model.

The more households consume, the less savings China's state-owned banks have to fund key industries, which currently include artificial intelligence and innovative technologies that will make Beijing economically and strategically superior to Washington. Therefore, some analysts doubt whether Chinese leaders really want to create a consumption-driven economy. The potential trade-offs between promoting consumption and maintaining state control over key industries raise questions about the government's long-term objectives.

David Lubin, a researcher at Chatham House, wrote: "It can be understood that Beijing's primary goal is not to improve the well-being of Chinese families, but to improve the well-being of the Chinese nation." Shifting power from the state to individuals may not be what Beijing wants. Chinese leaders did this in the past when they began trading with the world, encouraging businesses and attracting foreign investment. This changed their economy. But the question is, does Xi Jinping want to do it again? The fundamental question is whether the government is willing to relinquish control in favor of greater individual prosperity and consumer-driven growth.