Wednesday June 25th, 2025
Since 2000, Chinese consumer spending has grown faster than anywhere else in the world, at over +8% a year, after adjusting for inflation. That’s far ahead of other major economies. Even in recent years, when consumer spending growth rates slowed, China still grew at about +5% a year. Only Turkey has come close, but its growth was driven by a credit boom and a large refugee population.
In China, consumption makes up just about 40% of GDP, which is lower than in most countries. But this isn’t because Chinese people are tight with their wallets. It’s because investment, spending on things like factories, railways, and property, has grown even faster, averaging around +10% a year this century.
In other words, it’s not that Chinese people aren’t spending, it’s that the government and businesses are investing at an extremely high rate, which makes consumption look relatively small.
If you adjusted for this long-standing investment surge, China’s consumption would be closer to 55% of GDP, which is much more in line with global norms.
Consumer spending growth in China has also outpaced growth in other major Asian manufacturing nations like Japan, South Korea, Malaysia, and Indonesia, even when they were at a similar stage of development. When those economies matured, their consumer spending growth also slowed sharply.
Yet, people keep insisting that China must ‘unlock’ the spending power of its consumers. This narrative doesn’t really match reality. Walk around luxury shops in Shanghai or even in Paris, and you’ll find plenty of Chinese shoppers.
There is a slowdown in consumer services like restaurants and entertainment, but that’s partly misleading too. In China, the government provides many services, like education and healthcare, at low or no cost, so they don’t always show up in GDP stats. If you include those, consumption as a share of the economy is much higher than it appears.
The real issue isn’t that Chinese people are spending too little, it’s that China is investing way too much.
Right now, investment equals about 40% of China’s GDP. That’s extraordinarily high. In most countries, investment is a smaller portion of GDP than consumption. Only 10 countries in history have ever hit that 40% mark, and even then, just for a short time. China, however, has maintained it for 20 years, largely by fuelling the economy with debt.
This overspending on investment has led to overcapacity, meaning China produces more than it needs, which creates problems both at home and abroad. Domestically, too much money has gone into real estate, inflating a property bubble and creating a mountain of debt. Internationally, China ends up exporting its surplus goods, which strains relationships with trading partners.
China’s government seems to be paying attention. In March, it announced a plan to “vigorously boost consumption.” But instead of making big reforms, it offered subsidies for people to buy things like home appliances. This might encourage short-term spending, but it doesn’t fix deeper problems. After all, someone who buys a rice cooker today won’t buy another one next year.
At the same time, household debt has tripled over the past 15 years and now stands at over 60% of GDP, one of the highest levels among emerging markets, and close to that of the heavily consumption-driven US. That makes it hard to squeeze much more spending out of ordinary families.
China’s economic imbalance isn’t caused by underconsumption. The problem is chronic over-investment, driven by a state that has focused on hitting aggressive GDP growth targets, currently set at 5% even when that meant flooding the economy with cheap debt and building more than needed.
Rather than shifting that same state-driven approach from investment to consumption, the better path may be to accept a lower, more realistic growth rate, closer to 2.5%, based on China’s ageing population, falling productivity, and high debt.
As growth slows naturally, consumer spending will become a bigger part of the economy without needing to be forced. In the end, the answer isn’t pushing people to spend more, it’s accepting that China needs to grow more sustainably.
We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.
Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.
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