China's Stimulus Policies Fail to Boost Domestic Consumption Amid Export Growth

Manishi Raychaudhuri argues that Beijing may need stronger direct support for households as trading partners restrict China's export-led growth. China's high-tech exports are expanding rapidly, while household spending and employment growth are stagnating. Export growth supported by worldwide spending on AI and clean energy helped third-quarter GDP expand 4.5% year-on-year. Retail sales increased modestly from a weak comparison base, while the prolonged housing downturn continued to depress domestic activity.

Residential property represents about 70% of household assets on average in China, and falling home prices since 2021 have reduced wealth and constrained spending. Rising employment insecurity appears to encourage households to save more as a precaution. The official urban unemployment rate has remained near 5% over the past three years. Youth unemployment has ranged between 14% and 19%, highlighting difficulties in generating jobs. A People's Bank of China survey in 2024 linked the rising savings rate to labor-market weakness.

Raychaudhuri argues that Beijing's policy decisions explain the divergence between export strength and domestic weakness. China has long identified technological self-sufficiency as a strategic objective. The "New Quality Productive Forces" model, presented in late 2023, advocated substantial investment in digitalization, networking, biotechnology and AI. In March, the 15th Five-Year Plan identified six emerging industries as future growth pillars: AI and robotics, semiconductors, advanced mobile communications, quantum technologies, biotechnology, and drones and air taxis. Raychaudhuri argues that the strategy may have merit amid technological competition with the United States. However, Raychaudhuri argues that the strategy appears to weaken consumption through household wealth losses, fewer resources for social protection and reduced support for labor-intensive industries.

Since 2020, Beijing has redirected capital from property toward advanced manufacturing and green energy. Outstanding property-sector bank lending has stagnated during that period. Manufacturing loans have grown by 10% to 15% annually. Green technology loans have increased by 20% to 40% annually. Raychaudhuri argues that this allocation has obstructed a property recovery and consequently weakened household consumption.

Raychaudhuri argues that large investments in advanced manufacturing and green technology may increase GDP without resolving unemployment. The IMF has warned that expansion in industries such as electric vehicles shifts employment toward automated, capital-intensive production rather than widespread job creation. Research into China's private education ban found that the ban eliminated 3 million jobs. Internet platforms and property developers have also cut large numbers of jobs.

Raychaudhuri argues that rapid manufacturing expansion and weak domestic demand have created overcapacity, much of which China has exported, echoing accusations from the United States and EU. Raychaudhuri argues that overcapacity has intensified domestic competition and severely reduced prices and margins in electric vehicles, solar panels, batteries and e-commerce. Beijing's efforts to curb this competition, known as "involution", have achieved little so far. Major trading partners, including the EU, are introducing trade barriers, limiting export-led growth and increasing the risks of failing to revive household spending.

China's September 2024 monetary and fiscal package sharply lowered bank reserve requirements and benchmark policy rates and eased restrictions on home purchases. The central government also began addressing local-government debt and providing support to low-income households. However, measures announced last month were considerably smaller, concentrating on capital injections into state-owned banks and insurers and subsidies for consumer credit. Government advisers proposed raising household consumption from 40% to 50% of GDP over the next two five-year cycles through an upcoming 15th Five-Year Plan target, but policymakers did not adopt the recommendation. IMF figures put total government debt, including central, local and off-balance-sheet government financing vehicles, at 127% of GDP in 2025, up from 80% in 2019.

Raychaudhuri argues that mounting debt helps explain the restrained fiscal response, but economic rebalancing also requires changes beyond fiscal and monetary assistance. The IMF has proposed redirecting public resources toward households, improving healthcare, unemployment and pension protection, and easing the hukou registration system to give 200 million rural migrant workers urban status. These proposals have drawn limited enthusiasm, although some Beijing officials have supported shifting the economy from exports toward consumption. Raychaudhuri argues that such a shift would likely slow growth initially and could impose painful adjustments on parts of the economy. Raychaudhuri concludes that overcoming China's structural obstacles to rebalancing may be a central question for the world economy over the next decade.