Why is it difficult for China to boost consumption?
In its 15th Five-Year Plan (2026-2030) launched in March 2026, China set a growth target of 4.5%–5% and has put renewed focus on increasing domestic consumption. However, it is difficult for Beijing to increase domestic consumption and this will continue to hinder economic growth in the future.
Multiple Causes
Chinese measures aimed at boosting domestic consumption focus on increasing both purchasing power and consumer choices in rural and urban areas. The government is also working to ease financial pressures on households by lowering costs for services such as healthcare, elderly care, and childcare. Additional steps include raising the minimum basic pension for both urban and rural residents and expanding consumer goods trade-in programmes that provide subsidies for replacing older products, along with other related initiatives.
Despite these measures, consumption is unlikely to increase significant for multiple reasons. First, there is a lack of social security. According to a 2019 Chinese Academy of Social Sciences report, the National Social Security Fund established in 2000 to finance China’s future pension obligations is likely be depleted by 2035. By 2040, 28% of China’s population will be above the age of 60. Further decline in the working age population (16-59 years) is expected as the demographic challenges hit China hard especially after 2035. This has led to households cutting consumption and increasing savings. Increase in old age dependency will lead to decline in consumption and lower economic growth because of the propensity for lower consumption among the elderly.
Second, is the problem of the property sector. Wealth strongly influences consumption. When assets such as real estate and stocks rise in value, people tend to spend more; when they fall, spending declines. The current drop in property prices is, therefore, weighing on consumption. A large stock of unsold residential and commercial buildings has weakened buyer confidence and pushed prices down further. As a result, homeowners’ net worth in China has fallen, making consumers more cautious. Continued weakness in the property sector is expected to keep prices under pressure and further reduce consumer confidence and spending.
A third reason is weak consumer confidence. This stems not only from problems in the property sector and falling housing prices, but also from broader economic conditions and high youth unemployment (around 20%). Consumption depends not just on income, but also on expectations about the future. When economic prospects appear strong, people are more willing to spend, and when outlooks are uncertain, they hold back. After COVID-19, many people have lost trust in government policies in China. Currently, pessimism about growth, stagnant prices, and wage cuts in a highly competitive job market are forcing workers to accept lower pay, further reducing overall consumer spending.
Fourth, local government deficits—about 10 trillion RMB (US$1.4 trillion, roughly 7.5% of 2024 GDP)—pose a major challenge. These shortfalls stem from cuts to value-added taxes, heavy pandemic spending, falling land-sale revenues, and weak tax growth caused by a sluggish economy. Beijing has instructed local governments to honour guarantees on off-budget borrowing, much of it taken by state-owned enterprises (SOEs). As a result, local administrations in China have reduced spending, placing still greater downward pressure on aggregate demand since they play a central role in economic activity.
Fifth, is the problem in allocation of capital. Since the early 1990s, economic growth in China has relied on large transfers that subsidized investment in manufacturing, infrastructure, and property. These policies led to high and rising saving rates at the expense of households, contributing to weak domestic consumption while strengthening global industrial competitiveness. Key mechanisms included repressed interest rates—often negative in real terms—and limited risk-adjusted credit spreads, which effectively shifted wealth from savers to investors. Low returns reduced household income growth, while a tightly controlled credit system directed most savings through state-owned banks into priority sectors determined by Beijing, such as transport networks, communications, manufacturing capacity, and technology development.
Sixth, China’s hukou system for household registration has limited the ability of workers to obtain social benefits and limited their legal rights in disputes with employers. The limited right of workers to organize has prevented wages and household incomes from growing as fast as they might have otherwise. This has benefited local governments, SOEs, and businesses employers but at the expense of workers leading to lower domestic consumption.
The Way Ahead?
To boost consumption, Beijing could stimulate demand by directing fiscal support toward households. It could borrow about 1–3 trillion RMB and channel the funds, directly or indirectly, to consumers to boost spending. This shift would reduce overall investment but place more income in consumers’ hands. The Chinese government could further encourage consumption by lowering consumption taxes and scaling back industrial subsidies.
However, policymakers in Zhongnanhai view such measures as ideologically difficult. They also worry this would provide only a temporary boost while increasing debt, which they are trying to contain because China already has very high overall leverage. The International Monetary Fund estimates that in 2025, China’s general government debt reached about 124% of GDP when off-budget local liabilities are included, while its total non-financial debt exceeds 300% of GDP. The IMF also notes that China’s debt has expanded so quickly that it is responsible for more than half of the rise in the global debt-to-GDP ratio since 2008.
A more sustainable solution would be to gradually reverse past transfers—by reallocating resources away from state-driven investment toward households by boosting wage growth, strengthening social safety nets, implementing land and SOE reforms, and overhauling the hukou system—so household incomes grow faster than GDP. However, this would reduce the income share of businesses and local governments, and of the central government. It could also weaken manufacturing competitiveness and infrastructure investment, slowing exports and overall economic growth and thus endanger the survival of the Communist Party regime.
This article was originally published in The Tribune as part of an arrangement with the Centre of Excellence for Himalayan Studies, Shiv Nadar University, Delhi NCR
About the Author: Raj Verma is a Visiting Fellow at the Elliott School of International Affairs, George Washington University