China's economy is facing a significant challenge with weak domestic demand, prompting the government to take decisive action. At the conclusion of the annual National People's Congress, Beijing announced an increase in investment in social welfare programs. This strategic move aims to make domestic demand the primary driving force and stabilizing anchor for the country's growth. President Xi Jinping has pledged to restore consumer confidence, particularly among the generation of graduates who entered the job market during the Covid-19 pandemic. Despite the lifting of restrictions in late 2022, Chinese consumers have remained cautious, reflecting a shift towards frugality that originated during the pandemic.
In an effort to address these economic challenges, the Chinese government is implementing measures to stimulate domestic consumption. A 2024 study by the Chinese think tank YuWa highlighted the financial burden of raising a child in China, estimating costs at 6.8 times the country's GDP per capita. This underscores the financial pressures faced by families, which contribute to restrained spending habits. Historically, China's consumption levels have been relatively low, with lower household incomes and higher savings rates compared to other countries. The government's current strategy aims to alter this dynamic by encouraging increased consumer spending.
The reliance on high household savings has been a double-edged sword for China's economy. While savings have been crucial for funding key industries like artificial intelligence and innovative technology through state-controlled banks, they have also limited disposable income for consumers. This has been further exacerbated by a labor force that includes a significant proportion of low-paid migrant workers who lack full access to urban social benefits. Consequently, while low-wage workers and high savings have fueled past growth, they have also restricted consumer spending.
Historically, China has leveraged trade and foreign investment to spur growth. However, with domestic consumption driving more than 80% of growth in countries like the US and UK, and around 70% in India, China's reliance on external markets is being reevaluated. The government is now focusing on stimulating internal demand as a more sustainable growth model.
Recent data offers some optimism for China's consumption recovery. Official reports indicate that retail sales grew by 4% in the first two months of 2025, signaling a positive trend in consumer spending. This growth is seen as a promising indicator that efforts to boost domestic demand may be gaining traction.
"The property market matters not only for real economic activity but also for household sentiment, since Chinese households have invested so much of their wealth in their homes," said Mr. DiPippo.
The property sector plays a crucial role in China's economic landscape. Many Chinese households have invested heavily in real estate, and fluctuations in this market significantly impact consumer confidence. As such, a stable and recovering property market is essential for bolstering household sentiment and encouraging spending.
"I don't think China's consumption will fully recover until it's clear that the property sector has bottomed out and therefore many households' primary assets are starting to recover," added Mr. DiPippo.
In response to these challenges, China is exploring various avenues to stimulate consumption. The government recognizes that even a modest increase in demand can have a substantial impact on the economy due to the country's large population.
"With a population of 1.4 billion, even a 1% rise in demand creates a market of 14 million people," noted Caiyun Wang.
Encouraging consumer spending requires addressing both economic and cultural factors. The pandemic has left lasting impressions on consumer behavior, with many individuals prioritizing savings over spending. This cautious approach has persisted even after the easing of pandemic-related restrictions.
"I apply perfume between my nose and lips now – saving it just for myself," shared a RedNote user, illustrating the changing consumer mindset.