Consumption conundrum

The limits of policy interventions

• Retail sales and other consumption proxies are struggling to regain momentum. Post-pandemic consumer spending is alarmingly weak, with 2024 retail sales growth at its lowest in over 30 years (excluding the Covid pandemic).
• Although China’s three-year action plan to boost consumption was announced back in February 2025, consumer confidence remains downbeat, coming in at just 87.5 in April 2025. The plan, jointly issued by five central government departments, aims to revitalize domestic demand through over a dozen initiatives focused on improving product quality, and encouraging trade-ins for big-ticket items. As the first State Council-approved blueprint targeting the consumption, it reflects a sustained policy push to shift China’s growth model toward stronger household spending—an effort that continues to unfold even months after its initial rollout.
• Even though income and inequality in China are significantly understated, the forces propelling income gains in China over the past decades resulted in a certain size and growth of proxies for consumption, such as retail sales. These structural forces, that once propelled income gains, have now decelerated.
• China’s household sentiment is being weighed down by four major economic forces: its own Four Horsemen of Uncertainty. First, rising labour market risks, income instability and tighter liquidity have led households to cut consumption and increase precautionary savings. Second, the real estate downturn, intensified by the “Three Red Lines” policy, has eroded housing wealth and dampened consumer confidence. Third, the US-China Trade War has weakened corporate profits, job creation, and income growth, amplifying economic anxiety. Lastly, the evolving push for “common prosperity” has introduced institutional shifts and policy uncertainty, further unsettling household expectations and spending behaviour.
• Policy support for low-income households is well intentioned and necessary: China’s income inequality remains stark, with the top 10% of earners contributing 90% of personal income tax revenue. Demographics are a ticking time bomb, with over a third of the labour force nearing retirement and/or lacking the skills or income to drive future consumption. Nevertheless, boosting low-income households’ income, wealth and purchasing power is economically insufficient because their consumption share is too small to offset the broader headwinds.
• Interestingly, luxury consumption may be a relative bright spot in H2. In part that is because of favourable base effects, but also because only modest sentiment improvements among the wealthy would be capable of lifting headline consumption data, which may be underpinned by stabilisation in residential property markets in key cities, such as Beijing and Shanghai. Notwithstanding, the path forward is structurally constrained, and, while policy is adapting, the transformation towards a consumption-led economy will be tedious and uneven.