Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
China’s 300 billion yuan ($42 billion) consumer goods subsidy program, a key policy to boost household demand and support a targeted 5% economic growth, is set to expire at the end of 2025. While initially effective in stimulating purchases of durable goods like home appliances and electric vehicles, the scheme is now facing a “payback effect” as consumers who have already utilized the subsidies are no longer in need of new purchases, raising concerns about future consumption trends.
Subsidies’ Impact and Fading Effect
The subsidies, equivalent to approximately 0.2% of China’s Gross Domestic Product, have contributed an estimated 0.5 percentage point to GDP growth this year, according to Macquarie’s chief China economist, Larry Hu. This surge was evident in the first nine months of the year, with refrigerator sales spiking 48.3%, electric vehicles 34.9%, and audio-visual gadgets 26.8% compared to the same period in 2024.
However, economists warn that this growth is borrowed from the future. Nomura’s China economist Hannah Liu noted that such policies encourage consumers to advance durable goods purchases through one-time price reductions, inevitably leading to a “payback effect.” Nomura anticipates a significant drop in sales for home appliances by around 20% year-on-year in the fourth quarter, and auto sales by 2.0%.
This downturn is already visible on the ground. Shi Xiaolan, a salesperson in eastern Anhui province, reported her shop’s sales plummeted from 13 million yuan in June to 3 million yuan in July, with no recovery since. Cheng Sha, an air conditioner shop owner in the central city of Jingzhou, expressed concerns about store closures as the subsidy effect fades, stating that two-thirds of similar merchants in his city face a dire situation.
Calls for Structural Reforms
The diminishing impact of these subsidies underscores China’s persistent structural weakness in household demand. Policymakers are now pressured to consider more durable and potentially costly reforms to ensure sustainable economic growth, moving beyond short-term stimulus measures.
Robin Xing, chief China economist at Morgan Stanley, suggests that Beijing could shift focus to subsidizing the service sector next year, using vouchers for dining, cinema, or travel. This approach, he argues, could reduce front-loading of purchases and be more effective in creating jobs due to the labor-intensive nature of services.
Beyond immediate stimulus, there are growing calls for comprehensive social welfare reform. Xing estimates that increasing social welfare accounts for farmers and rural migrant workers to approximately 1,000 yuan per month, up from the current minimum of 143 yuan, could elevate Chinese consumption to 45% of GDP in five years from about 40% currently.
This shift is considered crucial given that China’s household consumption lags the global average by about 20 percentage points of GDP, while its investments, primarily in infrastructure and manufacturing, are about 20 points ahead. This imbalance contributes to the economy’s over-reliance on exports, exacerbating trade tensions and fueling domestic deflation.
Outlook for Sustainable Growth
As China’s significant consumer goods subsidy program winds down, the immediate challenge is managing the anticipated decline in durable goods sales. The situation highlights the urgency for Beijing to implement deeper structural reforms aimed at bolstering household income and welfare, moving towards a more consumption-driven and sustainable economic model rather than relying on cyclical, short-term stimulus.
