China needs more than ‘incremental’ consumer stimulus longer term

China’s efforts to boost household spending are expected to help the economy hit the government’s 2024 growth target of roughly 5%, but the authorities may have to do more for consumers from next year or accept slower growth.

Trade tensions and local government debt risks leave Beijing few alternatives to revving up consumer stimulus in coming years, but vague promises of "incremental measures” look likely to fall short, analysts say.

China’s leaders signalled this week that fiscal support for the rest of the year will "focus on consumption”, aiming to boost incomes and social welfare, days after announcing plans to use 150bn yuan ($20bn) in government debt to finance trade-ins on consumer goods such as appliances.

This marks a departure toward boosting chronically weak domestic demand after decades of reliance on exports and infrastructure spending that helped vault China to the world’s second-biggest economy.

Still, the trade-in programme, China’s first debt-funded step to directly support household consumption nationwide, amounts to just 0.12% of gross domestic product. Further consumption stimulus is "plausible next year in the face of potentially stronger external headwinds”, Citi analysts said.

The fridges-not-bridges shift is driven by growing unease with China’s trade dominance, which has pushed the US, Europe and emerging economies from Turkiye to Indonesia to raise tariffs and place other barriers on Chinese products.

In addition, the authorities are growing wary of debt-funded projects as they increase scrutiny on heavily indebted municipalities. Most of China’s fiscal stimulus still goes into investment, but returns are dwindling and the spending has saddled local governments with $13tn in debt.

Local governments sold 1.49tn yuan ($200bn) of the special bonds used to fund stimulus in the first half of the year, just 38% of the full-year quota, making China’s fiscal stance unexpectedly tight.

"The number of really good projects that produce stable income keeps getting smaller,” an economic adviser to the government said on condition of anonymity.

China’s export outlook is likely to keep worsening, especially if Donald Trump returns to the White House, as the US former president and Republican candidate for November’s election has threatened tariffs of up to 60% on all Chinese goods.

Yue Su, principal China economist at the Economist Intelligence Unit, estimates that a 10% increase in US import tariffs could cut China’s real economic growth by 0.3-0.4 percentage points next year and in 2026.

"The urgency to stimulate the domestic economy is highlighted by increased external pressures, including the potential return of Trump,” she said. "A more decisive domestic-focused policy and fiscal expansion could mitigate some of these effects.”

China’s household spending is less than 40% of GDP, some 20 percentage points below the global average.

To revive consumption just to its pre-pandemic trendline would require 3tn yuan to 8tn yuan ($400bn-$1tn) in spending, said Christopher Beddor, deputy China research director at Gavekal Dragonomics estimates, who thinks that much stimulus is unlikely.

"The government’s track record of delivering on consumer stimulus is frankly pretty poor,” he said.

Xu Hongcai, deputy director of the economic policy commission at the state-backed China Association of Policy Science, said boosting demand sufficiently might need re-allocating 5tn yuan from investment projects to consumers.

"In the short run, 5tn yuan in stimulus would be forceful,” Xu said. "But in the long run, we need to improve the proportion of income of urban and rural residents by 20 percentage points of national income.”