By Zhang Jun - Project Syndicate | April 21, 2025
Since late 2022, Chinese policymakers have understood that falling consumer demand was becoming a major problem for the economy. But while recent stimulus measures have helped to alleviate some of the downward pressure, far more could be done to boost households' spending power.
SHANGHAI – There are signs that the Chinese economy has been improving, owing to the government’s September 2024 stimulus package. Year-on-year GDP growth in the first quarter of this year reached 5.4% – continuing the marked acceleration from the third quarter of last year.
In fact, the change in policy direction has been evident since late 2022, when Chinese policymakers acknowledged that falling demand was becoming a major problem. The most important cause was the real-estate market, where a collapsing price bubble hit local government revenues hard, cutting into residents’ property and business income (an important part of disposable income) and pushing consumer spending below trend.
To alleviate the pressure on local governments, the central government allowed them to expand their debt financing by issuing $1.4 trillion worth of long-term bonds (over five years) to replace their short-term debt. Proceeds from long-term bond issuances were also used to shore up state-owned commercial banks’ balance sheets and enhance their capacity to generate credit. Meanwhile, the central bank has maintained faster credit growth, but is being cautious about lowering policy rates. With China’s real interest rates above 4%, a significant rate cut is unavoidable given concerns about exchange-rate volatility and commercial banks’ financial condition.
Chinese authorities understood that stabilizing the property and stock markets could mitigate the slowdown in consumer spending. Thus, the stabilization strategy requires local governments to use a portion of the special debt financing they receive to purchase unsold residential buildings on the market, and to use those units as guaranteed housing for local residents. It also requires state-owned non-bank financial institutions to buy back and hold more shares. In another country, such measures would sound implausible. But China’s state-owned financial system makes them feasible.
Moreover, there is broad-based social support for expanding government income assistance for households. During the National People’s Congress in early March, raising incomes and expanding protections for the elderly and infants were hotly debated topics. Though the government raised the minimum urban and rural basic pension disbursement by another 10% this year, most economists suggested that the standard should be much higher. After all, current disbursements are a mere 200 yuan ($27) per month in most small and medium-size cities and rural areas.
Calls for increased pension payments reflect large differences between regions. The basic pension in Beijing and Shanghai is almost 5-7 times higher than the national average mainly owing to big differences in local subsidizing capacity and the cost of living. Thus, to expand the overall level of consumer spending, it is crucial to reduce regional differences in the level of health care and pension protection.
China’s household consumption expenditure is largely positively correlated with family size and the number of children. But in addition to rapid aging, China is also struggling to deal with a low fertility rate. Although the government has lifted fertility restrictions – permitting families to have three children – the fertility rate remains at only around one. In surveys, younger Chinese point to the high cost of raising children as the top reason why they do not intend to have more.
Thus, the central government has promised to formulate a national policy to subsidize childbirth and child-rearing within the year, and many cities are already implementing local policies to subsidize or reward childbirth. For example, one city in Inner Mongolia recently offered a 50,000-yuan subsidy for a second child, and 100,000 yuan for a third.
It has been nearly 70 years since China implemented its hukou household registration system, which limits rural residents’ options for internal migration. Yet with hundreds of millions of migrant workers entering big cities, facilitating their integration has become imperative. China needs to ensure that every resident enjoys equal access to jobs and public benefits, including childcare and schooling, employment, health care, and pensions.
Such urbanization will greatly increase the scale of consumer demand. If more families receive higher transfers from the government – whether in the form of pensions or fertility incentives and subsidies – that would boost household consumption of services such as childcare, education and training, health care, and elderly care. These are precisely the parts of China’s consumer demand that remain significantly untapped.
DeepSeek’s recent breakthroughs opened the world’s eyes to China’s progress in AI and high tech. The country clearly has the potential to advance cutting-edge technologies, owing to its huge and diverse domestic economy, deep talent pool, and well-developed supply chains. Continuous technological breakthroughs will allow it to produce higher-value-added goods, with all the gains that implies for incomes, productivity, and domestic demand for services.
But government programs will have to adapt to this new phase of development. With large-scale construction spending having peaked, policies now need to help ensure that labor receives a higher share of national income. That means directing more fiscal firepower toward income support for households, and toward providing better, more equitable social protections. Higher household incomes and lower savings rates are key to unleashing the purchasing power of China’s 1.4 billion people.
Zhang Jun, Dean of the School of Economics at Fudan University, is Director of the China Center for Economic Studies, a Shanghai-based think tank.
Copyright Project Syndicate
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