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Standard Bank Group
Inside China 21 January 2026

China's consumption conundrum

Jeremy Stevens

  • China ended 2025 with a familiar, awkward boast: GDP grew 4.9%, enough to claim that the “around 5%” target was met; yet households’ consumer share of output thinned again. Retail sales eked out 2.7% in value terms, a three-year low, and by December volumes were contracting. Real retail sales ended 2025 well below their pre-Covid trend, a shortfall of roughly CNY10tn, or 7-8% of GDP.
  • China’s consumption share is, arguably, artificially depressed because health, education and imputed rent are priced below market. However, even under maximal re-pricing, the share would stay below 50% of GDP—more than 15 pp below the OECD median. More importantly, cheap prices do not explain households’ low marginal propensity to consume (MPC), or the fact that households have lengthened the replacement cycle, a tell-tale sign that expected lifetime income is judged too thin to refresh the stock. Thus, the data implies that to keep the subsidy carousel spinning, Beijing must keep widening the trade-in arc—from fridges to coffee-machines to e-bikes.
  • Now, five concomitant shocks to balance-sheets, income-risk, credit, fiscal and expectations are making the loop self-reinforcing. And, each is locked in by a policy constraint, such as hukou, the deficit ceiling, NPL red-line, land-finance model, and the ongoing commitment to the property crackdown.
  • Granted, policy rhetoric has escalated from a 2013 footnote to 2025 standing agenda item, complete with NDRC scorecards and PBoC rediscount quotas for consumer finance – yet fiscal firepower remains anchored towards new productive forces. Fundamentally, that is because policy measures are focused on altering the structure of the economy, altering incentive structures and funnelling resources towards certain key areas. The bet is success in this realm will both deliver producer power and indirectly restructure how incomes, wages and profits are distributed.
  • The gamble is shrewd, but that relay will take many years to show up in the national accounts, ruling out any quick surge in 2026 consumption data. The immediate hitch: the new, smaller cohort of highly paid technicians have a markedly lower marginal propensity to consume than the migrant carpenters they replace; so, the consumption multiplier weakens, even while productivity rises.
  • What to expect in 2026: goods will trundle along at 3% growth: trade-in rebates are pencilled in but capped at less than 0.5% of GDP. However, without a concerted central government-led push. Until property prices stabilise and the budget redirects at least 1% of GDP towards household transfers, the long-promised rebalancing will remain a slogan whose arithmetic footprint keeps marching in the wrong direction.
  • Policymakers have identified services as a new frontier of Chinese growth, where Beijing is prepared to write cheques. At the State Council session of 16 January, Premier Li Qiang unveiled two service-sector tonics: public money will seed novel apps and business models, while regulators write thicker rulebooks on credit, standards and safety. Both aim to spur supply, but neither puts cash—or confidence—into consumers’ pockets. Early modelling implies that the package of measures announced so far could lift services consumption to 7% in 2026 (having slipped from 6.2% in 2024, to 5.5% in 2025), adding 0.5 pp to GDP—enough to edge up the consumption share, but it will be a long slog close a 15 pp gap.
 

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