China must invest big at home to boost prosperity

China’s economy met the government’s growth target in 2025 with real GDP expanding by 5%. Exports played an outsized role. Despite a simmering trade war with the United States, China finished up with a record surplus of US$1.2 trillion as it found new export markets.

Yet behind the data, China’s economy continues to face some stubborn headwinds. Consumer spending remains subdued. Exports – while strong – face mounting global uncertainty. And government expenditure is constrained by public sector debt pressures.

Adding to this, China’s population continued to shrink for the fourth straight year in 2025 as the birth rate reached a record low, reinforcing concerns an ageing population will hold back the economy in coming years.

A shrinking population isn’t necessarily incompatible with rising living standards. What matters is whether productivity growth can compensate for a smaller workforce.

Deeper factors

For China, that means domestic investment, rather than consumption or expansionary government spending, is likely to be the key mechanism for sustaining growth. Data suggest China’s weak household consumption is not merely a temporary, but reflects deeper factors.

While GDP growth reached its annual target in 2025, retail sales grew by only 0.9% year-on-year in December, the slowest pace since late 2022. This highlights the fragility of consumer demand, despite policy measures aimed at supporting spending.

Although the services sector continues to expand and accounts for more than half of GDP, household consumption as a share of the economy remains low by international standards.

High savings rates, lingering uncertainty linked to the property downturn, and concerns about job and income security continue to weigh on spending decisions. This is consistent with long-running trends identified in academic research.

Policies to stimulate consumption can boost spending in the short term, but they have not fundamentally altered households’ preferences to save rather than spend.

Still, manufacturing output remained resilient, and net exports contributed to overall expansion. This helped offset weak domestic demand. Exports to the US did fall. But a shift to new markets in Southeast Asia, South America, Europe and Africa offset this decline.

Yet, China’s reliance on net exports is vulnerable. While they contributed heavily to growth in 2025, this pattern may be difficult to repeat amid protectionist pressures. In theory, government spending could step in to stabilise demand. Right now, that’s difficult in practice.

Financial risks

Local governments face high debt burdens, falling revenues from land sales and rising pressures related to social programs and maintaining infrastructure. This limits their capacity for large-scale spending without making financial risks worse.

Despite this, China continues to generate very high national savings. In 2024, they reached 43.4% of GDP. Meanwhile, consumption as a share of GDP – the reverse side of the savings rate – remained around 20 percentage points below the global average.

If a country’s savings are not absorbed domestically through productive investment, they end up fuelling a current account surplus. This can expose an economy to tensions with trading partners. Last year, investment in fixed assets fell 3.8%, with property investment falling 17%.

This signals the scale of the investment decline in the real estate sector and the need to pivot toward higher-returning sectors, such as manufacturing, services and technology.

In the long run, channelling China’s high national savings into efficient domestic investment could have greater impact than government stimulus measures. That’s as long as capital is allocated to productive firms and sectors rather than bridges to nowhere.

China’s shrinking population adds a crucial dimension to this challenge. Population contraction is not necessarily incompatible with rising living standards. But it creates a need to boost productivity, through technological progress, innovation and a skilled labour force.

Official statistics already show technology-intensive services and high-value manufacturing segments are expanding faster than the rest of the economy. But China’s 2025 growth outcome masks a set of enduring structural realities.

Global uncertainty

Consumer spending is likely to remain subdued, exports face increasing global uncertainty, and fiscal policy is constrained by debt burdens. The key policy challenge, therefore, is not to reverse demographic trends at any cost.

It is to accelerate the transition toward a more productive, capital- and knowledge-intensive growth model.

Yixiao Zhou is an Associate Professor in Economics and the Director of the China Economy Program at the Australian National University.

This edited article is republished from The Conversation under a Creative Commons license. Read the original article.

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