Weak consumer spending and China’s real estate crunch

GDP growth in China for the the first half of 2025 hit 5.3%. Despite US President Donald Trump’s tariff war, exports jumped by 7.3% – more than one-third of growth in the first six months of the year. 

But domestic demand remains weak and prices are still falling. The conventional wisdom identifies weak consumer spending as the culprit. Beijing has prioritized boosting household consumption. 

A 200 billion yuan, or US$28 billion, program was introduced to subsidize designated purchases last year and expanded by 300 billion yuan this year.

Still, the Chinese economy faces numerous downside risks, prompting many people  to save more. Household deposits increased by up to 18 trillion yuan, equivalent to 11.6% and 13.3% of GDP in 2023 and 2024. 

In the first half of 2025, another 10 trillion yuan was added. Many believe that Chinese people save because the social security system is insufficient against future risks. Yet the urban program is in fact strong. 

Rural areas

The size of aggregate retirement earnings relative to pre-retirement earnings is 60%. Before 2015, pensions were increasing between 7% to 10% every year. 

While growth has slowed, it is still about 70% of nominal GDP growth rates, like in the past. The system generally provides reasonable healthcare for urban residents.

The main problem is in rural areas where 40% of the population lives. The healthcare system was rebuilt at the turn of the century and now provides reasonable services. More problematic is the nascent pension system.

Retirees in many places receive just 200 RMB, or $28, per month. But the program is fully funded by local governments. Increasing payments would require a contribution system to be introduced.

Yet the inadequacy of rural pensions do not explain high national savings rates because they are mostly accumulated by urban residents. One must look beyond social security to find out why domestic demand is sluggish in China.

There are two elephants in the room that Beijing consciously avoids linking to weak consumer spending – the decline in the property sector and local governments’ fiscal deficits. The real estate sector has been declining since 2021. 

Sales and investment have been cut by half since the peaks of that year. But it still accounts for more than 15% of the Chinese economy.

Buying a home entails large spending on consumer goods such as furniture and home appliances. Spending in the most economically developed cities can easily exceed 300,000 yuan, or $42,000, per apartment. 

Wealth effect

Government subsidies don’t lift this kind of spending. As the old Chinese saying goes, the government is trying to pick up sesame seeds, but losing sight of the watermelon lying nearby.The real estate decline has more negative effects on consumption.

It is known as the wealth effect. Homeowners who are losing value in their property choose to consume less if they pay mortgages. Another negative aspect is a mood of falling confidence. 

For ordinary people, declining property prices and the stockpile of homes are clear signs of an economy headed downward. It is rational for them to save more.

Compared with the real estate sector, local governments’ fiscal deficits are a hidden problem that has not caught the attention of ordinary people.

But it is more serious. There is no credible source of statistics on the size of the deficits, but most estimates put it around 10 trillion yuan, or $1.4 trillion, about 7.5% of 2024 GDP. One cause of this daunting number is tax cuts that have been made during the past 10 years.

The rate of the largest – on value added tax– was lowered from 17% to 13%. There have also been several rounds of temporary tax cuts in addition to the regular exemptions for qualified companies – mostly in high-tech industries.

A second cause is significant pandemic-induced government spending. While central governments in most other countries did the heavy lifting, local governments in China footed most of the bills.

Another cause is the decline of land sales revenue. During the peak year of 2021, local governments collected 8.9 trillion yuan, or $1.2 trillion, in revenue. In 2024, this figure declined to less than three trillion yuan or $416 million. 

The final cause is the slow growth of the tax base due to a sluggish economy. Beijing has asked local governments to deliver on their guarantees to pay off-budget debts, which are often borrowed by state-owned entities. 

Local government spending has in consequence been constrained. Kickstarting China’s domestic demand requires the authorities to give much more attention to reversing the negative trends in the real estate and the local government sectors. 

Idle property

The central government realizes the problem. Income raised from special government bonds – initially designated for financing local projects – can be used to reduce local governments’ fiscal deficits and buy idle stock of apartments. 

But more funds have to be raised. Furthermore, local governments do not have any incentive to purchase idle property. The central government will have to take the reins in rehabilitating both sectors.

Yang Yao is a Professor and Dean of DAFI, Shanghai University of Finance and Economics, and a Visiting Professor at Peking University.

This edited article is republished from East Asia Forum under a Creative Commons license. Read the original article here.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.