China’s economic data for January-February surpassed expectations. The government has introduced a ‘Special Action Plan to Boost Consumption’, which includes measures to raise incomes, stabilise housing and stock markets, and enhance medical and pension services.
China aims to shift its economy from reliance on investment to domestic consumption, a goal established during the December 2004 Central Economic Work Conference. However, three structural constraints hinder substantial improvements in consumption.
Household Income And Government Influence
First, household income comprises 61% of GDP, lower than the Western figure of 70-80%. Local governments dominate economic output through control of land sales and infrastructure investment.
Second, households save over 30% of GDP due to inadequate social safety nets and job insecurity, alongside an ageing population. Wealth concentration among higher-income groups further exacerbates this issue.
Lastly, household debt stands at 145% of income, compared to 95% in the US by Q4 2024. Implementing fiscal reforms that increase household economic share, coupled with a gradual currency revaluation, may support China’s transition from investment to consumption.
The latest data from China exceeded expectations, demonstrating that policy measures are beginning to take effect. Authorities have rolled out a broad plan aimed at lifting domestic demand. This includes initiatives to raise incomes, reinforce the housing and stock markets, and strengthen key social services like healthcare and pensions.
This shift towards consumption-led growth is not new. The government set this target two decades ago, but deep-rooted structural barriers continue to slow progress. The first challenge is the way income is distributed across the economy. Households receive a smaller slice of total output compared with Western levels. Local governments play an outsized role, controlling much of the economic activity through land sales and infrastructure projects.
Then there’s the issue of saving habits. People in China put aside a far greater share of income than those in other major economies, largely because of weak social security measures and job market uncertainty. An ageing population adds to these pressures. Wealth is also unevenly allocated, with higher-income groups holding a disproportionate share, limiting broad-based consumption growth.
Household Debt And Economic Stability
On top of this, household debt is already high. Compared with the US, where the debt-to-income ratio is lower, Chinese consumers have far less capacity to take on additional borrowing to finance spending. Giving households a larger share of total income would help, but such changes take time. A gradual shift in currency policy could also support the broader transition away from investment-led growth.
For those trading derivatives, all these factors shape market expectations. When assessing potential moves in equities, currencies, and other assets, it is vital to track how these policies play out in practice. Authorities may intervene in markets if sentiment weakens, and any signs of fiscal adjustment will influence medium-term demand trends.
From our perspective, the focus should stay on whether these changes translate into actual spending increases. Since local governments remain dominant, any shift in their financing methods could affect liquidity conditions. Meanwhile, savings behaviour will not change overnight, but any policy steps that reduce uncertainty, such as stronger welfare provisions, could gradually unlock spending.
Debt levels also need close monitoring. In an economy where households are already highly leveraged, any shift in interest rates or lending conditions could have an outsized effect. A policy mix that enables stable, gradual improvement in consumption would be the most favourable outcome. However, abrupt changes—whether in fiscal policy, monetary stance, or currency management—could introduce volatility.
Markets react not just to policy measures themselves, but to whether they instil confidence. If investors believe incomes will rise sustainably, or that authorities will act to support markets, sentiment could remain strong. On the other hand, any missteps in implementation could lead to uncertainty, with repercussions across asset classes.
So, in the coming weeks, the attention should be on execution rather than announcements. Policy direction is clear, but the pace and effectiveness of implementation will determine how markets respond.
