Staying the course

China’s domestic imperatives amid global uncertainty

• Geopolitical context: Despite a temporary easing in US-China tensions, long-term decoupling still looms over the prognosis. More importantly, China’s economic trajectory will be shaped more by domestic policy than external frictions. The strategic pivot toward consumption-led growth remains central to Beijing’s long-term sustainability. China is committed to reducing reliance on investment-heavy growth and boosting domestic demand. Policymakers are navigating trade-offs between growth, redistribution, and structural reform.
• Investment trends: Infrastructure investment has declined from 16% of GDP in 2017, to 13% in 2024. Investment is shifting from traditional sectors (e.g. real estate, roads) to “New Productive Forces” – such as advanced manufacturing and renewable energy. The USD167.8bn hydropower project exemplifies this shift, integrating hydro, wind, and solar. However, infrastructure investment is constrained by local government debt refinancing pressures. Worse, manufacturing investment, a key post-pandemic driver, is losing momentum. Advanced manufacturing investment contracted in June   its worst performance since 2020.
• Consumption: Retail sales remain weak once subsidies are excluded. Policymakers are trying to support consumption by “investing in people” and reducing costs for low-income households. Poorer households face high user fees and indirect tax burdens, limiting their consumption capacity. Rural retail sales remain stagnant, at around 13% of total, despite policy efforts.
• Some key social policy announcements in recent weeks: First, the Childcare Subsidy Expansion of CNY3,600 per child under 3; 20 million households targeted; 85–95% funded by central government. Second, the plan to make preschool free; potential CNY200bn annual transfer to households. Third, the roll-out of eldercare Subsidy of monthly vouchers of up to RMB800 for institutional care piloted in Zhejiang, Shandong, Chongqing.
• Fiscal constraints: Despite policy intent, welfare expansion is limited by falling revenue and rising debt. Fiscal space is constrained. That’s why pension increases were limited to 2% in 2025, a record low. Local governments are struggling to fund expanded services without central support.

Conclusion: China’s economic future hinges on successfully transitioning to consumption-led growth. Redistribution must be balanced with productivity and market vitality. Consumption growth will remain uneven and heavily dependent on affluent households. Structural reforms, demographic shifts, and policy recalibrations will shape a bumpy road ahead.

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