China’s Consumption Needs More Than a Subsidy Quick-Fix

Facing challenges from US tariffs and a struggling property sector, China has been trying to boost domestic consumption and stabilize economic growth. A durable goods trade-in program that debuted in mid-2024 has been a key scheme that has subsidized a wide range of goods purchases including digital products, home appliances and automobiles. The outcome so far appears to be encouraging, with retail sales growth rising to 5% y-o-y in the first five months of 2025 from 3.8% in Q4 2024.

However, Nomura economists believe the stimulating effects of the policy are unlikely to sustain. With the monthly average funding for the program expected to decrease in H2, a higher base from last year, and the government’s new austerity rule for public officials that is set to have a significant impact on the catering sector, we expect retail sales growth to fall to 3.1% y-o-y in H2 from an expected 5.1% in H1.

Weak consumption fundamentals unable to create new net demand

The cyclical nature of durable goods makes a sustained period of elevated sales growth unlikely. Categories that are stimulated early in the trade-in program, for example, autos and home appliances, weakened to -0.1% and 30.2% y-o-y, respectively, in the first five months of 2025, from 3.6% and 33.6% in Q4 2024.

The program, designed to refresh existing stocks of consumer durables, does not create new net demand. Weak consumption fundamentals persist, driven by negative wealth effects from declining property prices, sluggish income growth, subdued expectations and a structural mismatch in labor markets. Subsidies may also trigger a substitution effect, with households redirecting spending toward durable goods. Manufacturers, in expectation of a payback effect, may not increase investment and hiring.

Headwinds from the new austerity rule

The government’s new austerity measures targeting public officials and workers at state-owned enterprise, which account for an estimated 18% of China’s urban employment, could pose additional challenges. The new regulation prohibits alcohol and tobacco at government officials’ meals and discourages dining at upscale restaurants. The tobacco and liquor sectors will take a hit, while high-end catering services will also likely face a drop in demand due to fewer government-hosted events and reduced consumption by public sector employees.

Structural reforms crucial for longer-term consumption support

Given the inevitable payback from the trade-in program, China’s government will likely introduce more policy measures to shore up services consumption. However, it is difficult to stimulate services consumption with government subsidies. Unlike big-item durable goods, price of services such as hotel rooms or flights are more volatile. Subsidies can easily be offset by price increases, which may fail to truly stimulate demand.

In addition to shorter-term stimulus, which cannot be deployed too often, China should also consider longer-term structural policies to support consumption. Reforms to the social security system, such as an increase in basic pension payments to low-income households and raising subsidies for medical insurance, would be effective in reducing inequality and bolstering consumption. China’s falling number of newborns and shrinking population also put pressure on its economic growth. Subsidies in family support could reduce the cost of raising children and encourage larger families, supporting the economy in the long run.

For more on our China outlook, read the full report.