China faces a number of conundrums, but none is greater than this: President Xi Jinping wants domestic consumption to drive the economy. And he wants the economy to grow 5% this year.
Those two goals look incompatible. Mountains of exports made the Chinese economic miracle of the last four decades, which brought millions out of poverty and served as a catalyst for global economic expansion. China shipped cars and phones and textiles around the world, mostly to the U.S. and Europe. Nearly everyone involved benefited. Times were good.
Those halcyon days are over. China’s export engine is bloated at home and countries are refusing to import its goods for a range of reasons. The export part of the miracle is dead.
At the same time, leaders are grasping toward a GDP expansion rate of 5% for 2025. But this modest goal is being poked at from every direction.
China is cruising toward a U.S. trade war. Its youth are unemployed and disillusioned. The country is aging so quickly it will soon host a vast number of residents at its growing nursing homes—if citizens can afford it, which they can’t—the Chinese Academy of Social Science says the pension system will be dry by 2035.
The mismanaged property sector—which accounts for 70% of China’s economy—has been fizzling for years and draining with it trillions in middle-class savings.
China’s vast population of consumers—a billion customers—could buy goods and services and light a white-hot spark that would thrust the economy into soaring overdrive. But they aren’t spending. They are nervous about the political and economic environments. Everyone knows someone who’s been ruined by the property meltdown.
“I don’t think I’ve bought any new clothes in five years,” said 29-year-old legal assistant Wu Lingyi.
Adam Wolfe, Emerging Markets Economist at Absolute Strategy Research, said “the level of real household income and consumption are both about 8% below their prepandemic trend lines.”
Wolfe argues that—rather than simply falling property prices or jittery savers—the decline in returns on financial assets has been a key factor dragging down consumption.
This is apparent in the recent fall in bond yields, he said. “We estimate that the yield on the average household’s financial assets slipped to 2% as of November 2024, down about 30 bps from a year prior and roughly half of the prepandemic level. This is likely to remain a constraint on income growth, especially for wealthier households, which account for a disproportionate share of consumption.”
Beijing has reform options available to boost consumption, but they vary in financial and political viability. Structural reforms are needed to address the rural-urban divide, the precarious position of migrant workers, and the misallocation of capital by SOEs and banks.
Article in full: China Wants Its Economy to Grow 5%. Consumers Aren’t Buying It.
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