China's consumer spending continues to show minimal signs of recovery, a trend attributed to a confluence of factors including pervasive uncertainty about future wealth, evolving consumer preferences, and the absence of a robust social safety net. This persistent stagnation is underscored by four consecutive months of declining consumer prices, consumer confidence hovering near historical lows, and a struggling real estate market that has yet to demonstrate a turnaround. Analysts consistently identify stagnant income as the primary culprit.

Since the onset of the pandemic in 2020, disposable income growth in China has halved, now averaging a mere 5% annually, as reported by Jeremy Stevens, Beijing-based Asia economist at Standard Bank. Wage growth remains largely subdued across most sectors, with only three out of 16 – mining, utilities, and information technology services – seeing wage increases outpace gross domestic product growth since 2020. Monthly business surveys for May indicated a widespread contraction in the labor market, exacerbated by factories navigating U.S. tariffs. The unemployment rate among young people aged 16 to 24 who are not in school remained notably high at 15.8% in April, while the official jobless rate in cities hovered around 5%.

A significant cultural inclination towards saving further dampens consumer spending. A record 64% of Chinese households in the third quarter of 2024 expressed a preference for saving over spending or investing, according to a People's Bank of China (PBOC) quarterly survey. Although this figure slightly moderated to 61.4% in the fourth quarter, the trend of over 60% of respondents prioritizing saving has been consistent since late 2023. For those few respondents planning to increase spending, education emerged as the top category, followed by healthcare and tourism. Over half of the survey respondents perceived the job market as becoming more difficult or uncertain, reinforcing saving behaviors, particularly given limited insurance coverage that necessitates individuals bearing significant costs for hospital treatments, higher education, and retirement. The ongoing real estate slump, which impacts a substantial portion of household wealth in China, has also heavily contributed to reduced spending.

Policy measures aimed at stimulating consumption have been discussed and implemented to some extent. Luo Zhiheng, chief economist at Yuekai Securities, suggested that significantly increasing pension payouts by boosting the share of state assets allocated to the Ministry of Finance could encourage spending. He also proposed increasing public holidays and offering consumption vouchers for the services sector. In recent weeks, Chinese authorities have intensified efforts to bolster employment and enhance social welfare. However, policymakers have deliberately avoided the widespread cash handouts seen in countries like the U.S. and Hong Kong post-pandemic, opting for more targeted approaches. Analysts had previously cautioned that retail sales in China would recover slowly due to unresolved consumer uncertainties.

A notable shift in consumer behavior and preferences is also at play. In the decade preceding the pandemic, Chinese consumers were eager adopters of new innovations. Now, they exhibit greater rationality, making more considered purchasing decisions. This is evident in the turn towards lower-priced products, partly benefiting from the overproduction of relatively high-quality goods, and a demographic shift away from major metropolitan centers. Shanghai and Beijing, typically categorized as 'tier 1' cities, experienced population declines last year (72,000 and 26,000 permanent residents, respectively), according to a report by Worldpanel and Bain & Company. Consequently, smaller 'tier 3' and 'tier 4' cities witnessed significantly higher growth in both the volume and value of daily necessities sold last year, effectively offsetting declines in tier 1 cities. This study, covering packaged food, beverages, personal care, and home care, found that while the overall volume of such goods sold in China rose by 4.4% last year, average selling prices fell by 3.4% as consumers opted for cheaper alternatives and businesses intensified promotions.

This trend extends even to niche markets like flower sales. The Kunming International Flora Auction Trading Center in Yunnan province, Asia's largest flower market, reported in May that increased demand is originating from less affluent lower-tier cities, leading to higher sales volumes but lower average selling prices. This disparity is further highlighted by official data showing rural per capita disposable income has consistently been less than half that of urban areas for years; urban per capita disposable income was 54,188 yuan ($7,553) last year, a stark contrast to $64,474 in the U.S. as of December.

Standard Bank's Stevens observed that the ratio of consumption to income in rural areas has 'substantially increased,' surpassing pre-pandemic levels, while that of urban households has declined. However, he emphasized that lower-income households lack the significant wealth scale of higher-income groups, limiting their ability to substantially boost consumption in the short term. The top 20% of the population accounts for half of China's total income and consumption, and 60% of total savings. Stevens concluded that