China is grappling with persistent deflationary pressure and chronically weak household spending, according to a new analysis published in The Diplomat, which warns that without deep structural reforms — spanning social security systems, income redistribution, and cultural attitudes toward saving — Beijing faces an uphill battle in making consumption a genuine engine of growth.

The Property Collapse and Its Economic Fallout

For decades, real estate served as the cornerstone investment for China's first-generation middle class. That foundation has since cracked. According to the report, real estate development investment fell by 17.2 per cent in 2025, while new home sales declined by 8.7 per cent. The property meltdown has created what the analysis describes as 'severe negative effects on the economy,' and neither central nor provincial-level stimulus measures have meaningfully altered the trajectory.

Consumer confidence has deteriorated in tandem. A recently published survey in China found that 62.3 per cent of respondents said they preferred to save more, compared with only 19.2 per cent who favoured spending more and 18.5 per cent who preferred to invest more — a striking snapshot of a risk-averse public.

Consumption's Shrinking Role in China's GDP

The structural imbalance between consumption and investment in China is not new, but the numbers underscore how entrenched it has become. Household consumption accounted for 46.8 per cent of GDP in 2000, before sliding to a low of 34.6 per cent in 2010 — the same year investment peaked at 46.1 per cent of GDP.

By 2024, consumption had recovered only modestly to an average of 40 per cent of GDP, while investment stood at 40.5 per cent. In 2025, final consumption contributed just 2.6 percentage points to China's reported 5 per cent economic growth — a figure that critics argue overstates the health of domestic demand.

Demographic Pressures Compound the Challenge

The report also flags China's rapidly ageing population and shrinking workforce as a structural headwind. An older society, it argues, will require substantially more spending on care and health services than on manufactured consumer goods. This demographic shift complicates the Chinese Communist Party's (CCP) strategy of using trade-in coupons and goods subsidies to stimulate demand.

Notably, the analysis suggests the CCP may pivot toward stimulating demand for services — healthcare, eldercare, education — rather than goods. However, achieving that pivot 'requires the very investment in people that the system has so far been reluctant to make,' according to the report.

Why Structural Reform Remains Elusive

Analysts have long pointed out that China's savings-heavy culture is not purely a matter of preference — it reflects rational responses to inadequate public social safety nets. Without robust state-backed healthcare, retirement security, and unemployment insurance, households have strong incentives to self-insure through savings. The report argues that until these systemic gaps are addressed, consumption-led growth will remain aspirational rather than actual.

This comes amid broader global concern about China's economic model, with trading partners and multilateral institutions closely watching whether Beijing can rebalance away from export and investment dependence — a rebalancing that has been promised, but not delivered, for well over a decade.

Whether the CCP can engineer the cultural and institutional shifts required to unlock household spending will likely determine the trajectory of not just China's economy, but global demand dynamics in the years ahead.