Boosting Consumption: China’s Strategy to Revitalize Its Economy

By Jessica Huang

After years of relying on infrastructure investment and export-driven growth, China’s policymakers are shifting gears, placing domestic consumption at the heart of their strategy to revive the world’s second-largest economy. Faced with a sluggish post-pandemic recovery, declining global demand, and a real estate sector still reeling from its 2021 debt crisis, the Chinese Communist Party (CCP) is betting on the spending power of its 1.4 billion citizens to inject new life into the nation’s economic engine.
The pivot comes as China’s GDP growth slowed to 4.7% in 2024—below the government’s target of “around 5%”—marking one of the weakest performances in decades outside the pandemic years. With traditional growth drivers faltering, the State Council unveiled a sweeping package of measures in late January 2025 aimed at boosting household spending, signaling a rare acknowledgment that the old playbook of state-led investment is no longer enough to sustain momentum.

A New Economic Playbook

At the core of this strategy is a multi-pronged effort to put more money in consumers’ pockets and encourage them to spend it. On February 10, the People’s Bank of China (PBoC) announced a surprise 50-basis-point cut to the benchmark interest rate, bringing it to a historic low of 3.1%. The move, paired with a reduction in reserve requirements for banks, is expected to free up approximately 2 trillion yuan ($280 billion) in liquidity, much of it earmarked for consumer loans and subsidies.
“We must unleash the potential of consumption to drive sustainable growth,” said Premier Li Qiang during a press conference following the annual Central Economic Work Conference in December 2024. “Our people are the backbone of this economy, and their confidence and purchasing power will determine our future.”
The government has also rolled out direct incentives to spur spending. Vouchers worth up to 1,000 yuan ($140) per household are being distributed in major cities like Shanghai, Guangzhou, and Chengdu, targeting purchases of electronics, appliances, and green energy products such as electric vehicles (EVs). Rural residents, long neglected in favor of urban development, are also in line for cash handouts of 500 yuan ($70) to stimulate local economies.
Tax breaks are another pillar of the plan. The Ministry of Finance announced in early February that personal income tax thresholds would be raised for middle-income earners, saving an estimated 150 million taxpayers an average of 2,000 yuan ($280) annually. Small businesses, particularly in retail and hospitality, will benefit from a temporary VAT exemption through 2026, designed to keep prices low and encourage consumer activity.

Why the Shift?

The urgency behind this consumption-driven approach stems from a confluence of economic headwinds. China’s export machine, which powered decades of double-digit growth, has sputtered as trade tensions with the United States persist and Europe tightens its belt amid its own economic woes. Data from the General Administration of Customs showed a 3.2% drop in exports in 2024 compared to the previous year—the first annual decline since 2016.
Meanwhile, the property sector, once a cornerstone of GDP, remains a drag. The collapse of giants like Evergrande and Country Garden has left millions of homeowners with unfinished apartments and eroded trust in real estate as a wealth-building tool. Housing starts fell by 22% in 2024, and property values in tier-one cities like Beijing and Shenzhen have yet to stabilize, leaving households cautious about dipping into savings.
Perhaps most alarming for policymakers is the deflationary spiral threatening to take hold. Consumer prices rose by just 0.3% in 2024, teetering on the edge of deflation, while factory-gate prices declined for the 18th consecutive month in January 2025. Weak demand has fueled overcapacity in industries like steel and manufacturing, prompting fears of a Japan-style stagnation if spending doesn’t pick up.
“China is at a crossroads,” says Dr. Zhang Wei, an economist at Tsinghua University. “The old model of investment-led growth has run its course. Consumption must step up, but that requires not just policy tweaks but a cultural shift in how people view spending versus saving.”

Challenges Ahead

That cultural shift may be the tallest hurdle. China’s savings rate, among the highest globally at over 30% of disposable income, reflects a deep-seated preference for security over splurging—a legacy of decades of economic upheaval and a thin social safety net. Despite rising wages and urbanization, many households remain wary, socking away cash for healthcare, education, and retirement rather than spending on discretionary goods.
The government’s response has been to double down on “confidence-building measures.” State media has launched a campaign touting the resilience of the economy, while the National Development and Reform Commission (NDRC) unveiled plans to expand social welfare, including a 15% increase in pension payments and broader healthcare coverage starting in July 2025. The hope is that a stronger safety net will loosen purse strings.
Yet skepticism abounds. “Vouchers and tax cuts are a start, but they won’t change habits overnight,” says Liu Mei, a 34-year-old office worker in Chongqing. “My parents lived through hard times, and they taught me to save. I’ll spend if I feel secure, but not just because the government tells me to.”
Youth unemployment, hovering at 17% in urban areas as of January 2025, adds another layer of complexity. Graduates from China’s record-breaking 12 million college class of 2024 are struggling to find jobs, dampening their willingness to spend. The gig economy—ride-hailing, food delivery, and short-term freelancing—has absorbed some of the slack, but wages remain low, and job security is scarce.

Global Implications

China’s consumption push isn’t just a domestic story—it’s a global one. A spending boom could lift demand for imported goods, from Australian iron ore to German luxury cars, offering a lifeline to trading partners battered by weak growth. The EV sector, already a bright spot with companies like BYD and Nio leading the charge, stands to gain as subsidies drive sales both at home and abroad.
But risks loom large. If the stimulus overshoots, it could reignite debt concerns. China’s total debt-to-GDP ratio, already exceeding 300%, leaves little room for error. Analysts warn that flooding the economy with cheap credit could fuel asset bubbles or pile pressure on the yuan, which weakened by 5% against the dollar in 2024.
Geopolitically, the shift could alter China’s role in the world. A consumer-led economy might soften its reliance on exports, reducing friction with trade rivals like the U.S. Yet it could also intensify competition in high-value sectors like technology and green energy, where China aims to dominate.

Early Signs of Success?

It’s too soon to call the policy a triumph, but green shoots are emerging. Retail sales rose 3.8% year-on-year in January 2025, the fastest pace in six months, driven by a surge in Lunar New Year shopping. Online platforms like JD.com and Pinduoduo reported record traffic, with electronics and home goods leading the charge. Car sales, bolstered by EV incentives, jumped 12% in the same month, reversing a two-year slump.
Still, economists caution that one month doesn’t make a trend. “The data is encouraging, but we need sustained growth through mid-2025 to say this is working,” says Helen Qiao, chief Greater China economist at Bank of America. “The real test is whether households feel wealthy and secure enough to keep spending once the vouchers run out.”

Looking Forward

For now, China’s leaders are all in on consumption. The National People’s Congress, set to convene in March 2025, is expected to double down with a 2025 growth target of 5.5%—a bold bet on the new strategy. Additional measures, such as a national trade-in program for old appliances and expanded childcare subsidies, are rumored to be in the works.
As the Year of the Snake begins, Beijing’s message is clear: China’s economic future lies not in steel and concrete, but in the wallets of its people. Whether they open them wide enough to pull the economy out of its rut remains the trillion-yuan question.

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