In a supermarket in Fuyang this past February, shoppers pushed carts past red lanterns and “Golden Horse Welcoming Spring” banners during China’s longest Lunar New Year holiday on record. Rail networks carried more than 18.7 million passengers in a single day, and Hainan’s duty-free counters rang up 30.8% more sales than a year earlier. For a few weeks, it looked like Beijing’s demand stimulus push might finally be taking hold. The relief didn’t last. By May, retail sales had fallen 0.6% year-on-year — the first monthly decline in more than three years. Xi Jinping has spent eighteen months promising to make households, not factories, the engine of Chinese growth. The data keep saying otherwise.

That gap between rhetoric and reality sits at the centre of China’s economic story heading into the first year of the 15th Five-Year Plan. For two decades, growth has leaned on investment and exports — a model the IMF’s chief economist, Pierre-Olivier Gourinchas, has said needs to “pivot to a more domestically-driven engine of growth.” The IMF now projects China’s GDP growth will slow to 4.5% in 2026, down from 5% in 2025, with private domestic demand described as lackluster even as headline inflation averaged zero percent last year. The World Bank reaches a similar conclusion: households kept funnelling savings into bank deposits through 2025 despite real interest rates that were flat or negative, while local government revenue stayed squeezed by a continued slide in land-lease income. Beijing has answered with trade-in subsidies, interest-rate cuts and a 48-measure consumption action plan. None of it has shifted the basic arithmetic: China still saves more, and spends less, than almost any economy its size.

China’s Demand Stimulus Keeps Hitting the Same Wall

The headline number from May was stark. China’s National Bureau of Statistics reported retail sales fell 0.6% year-on-year, the first such drop since December 2022, reversing April’s 0.2% gain and missing even the most pessimistic forecasts in a Reuters poll. Home appliance and audiovisual equipment sales plunged 15.6%; auto sales tumbled 16.1%, extending an eighth consecutive month of decline in the world’s largest car market. Only services kept the picture from looking worse: spending on catering, travel and entertainment grew 5.4%, outpacing goods retail by 4.2 percentage points, according to Caixin Global.

Beijing’s response was immediate but modest. The government injected a fresh 62.5 billion yuan ($9.2 billion) into the consumer trade-in scheme by the end of June, even as it quietly scaled the 2026 program back to 250 billion yuan from 300 billion yuan in 2025, narrowing eligibility to cars, appliances and smart glasses. Nine government departments also rolled out a joint action plan built around 48 separate measures, spanning:

• Subsidised dining and catering vouchers in lower-tier cities
• Expanded reimbursement for elder-care and healthcare services
• Relaxed visa rules to draw foreign tourist spending
• Additional tax-refund points at border crossings for inbound shoppers

It’s a familiar pattern. The Ministry of Commerce says the broader trade-in program has driven 4.16 trillion yuan in cumulative sales since launch — real money, by any measure. Yet the same dataset shows why the lift keeps fading: full-year 2025 retail sales growth came in at 3.7%, trailing industrial output’s 5.9% expansion and the economy’s overall 5% growth rate, Reuters reported. Growth bottomed at 0.9% year-on-year in December, recovered to 2.8% in early 2026, then slipped to 1.7% by March as the subsidy cycle turned, in the words of analysts at ING, “from a tailwind to a headwind.” Auto sales fell 9.1% in the first quarter even as China’s passenger-car exports jumped 60.6% — a sign that excess domestic production is increasingly finding buyers abroad rather than at home.

Monetary policy moved alongside the fiscal support. The People’s Bank of China entered 2026 promising a “moderately loose” stance and in January cut interest rates on several structural lending tools by 0.25 percentage points, lowering the one-year central bank lending facility rate from 1.5% to 1.25%. Governor Pan Gongsheng has signalled more is coming, telling Xinhua there is “still room for further RRR and interest rate cuts this year.” New refinancing tools are now earmarked specifically for services consumption and elder care — a quiet admission that goods subsidies alone weren’t going to do the job. Consumer prices briefly perked up too: CPI rose 1.3% year-on-year in February, the fastest pace in three years, before easing to 1.0% in March as core inflation slipped from 1.8% back to 1.1%. Producer prices, meanwhile, are still falling, extending a fourth straight year of factory-gate deflation.

There’s also a self-inflicted wound. Beijing’s “anti-involution” campaign, aimed at curbing cut-throat price wars among manufacturers of everything from solar panels to electric vehicles, is meant to fix a supply-side problem. But the IMF’s Article IV report warns that continued industrial-policy support for priority sectors risks perpetuating the very overcapacity it’s trying to cure, adding to deflationary pressure rather than easing it. Subsidise demand with one hand and subsidise supply with the other, and the price level barely moves.

Why China’s Household Savings Rate Won’t Budge

Subsidies treat a symptom. The disease is precautionary saving, and it’s structural rather than cyclical. A December 2025 IMF working paper by economists Yizhi Xu, Fan Zhang, Rongyu Cui and Ding Hua traces China’s stubbornly high household savings rate to three forces that reinforce one another: thin social spending in rural areas, the hukou household-registration system that denies many migrant workers full access to urban healthcare, schooling and pensions, and a property-market correction that has eroded the wealth of homeowners, who make up more than 90% of Chinese households.

Why Is China’s Domestic Demand Still Weak?

China’s domestic demand stays weak because three forces compound: a property slump that erased household wealth, thin social safety nets that force precautionary saving, and a hukou system denying migrant workers full urban benefits. Subsidies lift spending briefly, but they don’t fix why households save first.

The mechanics matter. The IMF researchers find that falling housing wealth pushes homeowners to save more, not less, as they try to rebuild lost equity — an effect that has held steady since the property correction began in 2021. More than 50 Chinese developers have defaulted since then; Country Garden, once the country’s largest, saw contracted sales fall by 70% to 6.91 billion yuan in a single December after an October debt default. What’s shifted is the other side of the ledger: would-be buyers, once forced to save aggressively for a down payment, are increasingly just postponing the purchase altogether amid uncertainty over future prices — which means the old “save to buy” motive is weakening even as the “save because I lost equity” motive intensifies.

Hukou reform has made real, if uneven, progress. Beijing has eased registration restrictions in dozens of cities since 2024, and the National Development and Reform Commission has continued chipping away at residency limits in smaller cities. But the IMF’s modelling suggests reform alone won’t be enough. Pair stronger social safety nets with hukou liberalisation and a smoother property-market transition, the paper argues, and Beijing could meaningfully cut precautionary saving. Pursue trade-in subsidies in isolation, and the savings rate barely moves — which is more or less what’s happened since 2024.

The Second-Order Costs of a Spending Gap That Won’t Close

The consequences extend well past China’s borders. With factory-gate prices still falling, manufacturers facing weak domestic orders are doing what they’ve always done: exporting the surplus. That’s part of why passenger-car exports surged even as domestic auto sales fell, and a similar pattern is playing out across solar panels, batteries and steel. Trading partners in Europe and Southeast Asia have noticed, and China’s trillion-dollar annual trade surplus keeps surfacing as a flashpoint in talks with Washington and Brussels alike.

Inside China, the strain shows up in local-government finances and in investment data that are now flashing red alongside consumption. Fixed-asset investment fell 4.1% in the first five months of 2026, and property investment extended its slide, dropping 16.2% over the same period — a sharper fall than January-April’s 13.7% decline, Reuters reported. NBS spokesperson Fu Linghui attributed part of the slowdown to extreme summer heat and heavy rain in some regions, along with the broader transition from old growth drivers to new ones. Land-lease revenue, once a primary funding source for cities, kept contracting through 2025, and the World Bank found consolidated fiscal revenue growth barely turned positive — just 0.2% year-on-year through October. That squeezes precisely the public services, healthcare, pensions, childcare subsidies, that economists say would do the most to unlock household spending in the first place.

Underneath the headline weakness, consumer behaviour is shifting in ways the subsidy programs weren’t built to capture. Chinese travellers are spending less overseas and more at home — a swing Bloomberg Intelligence estimates could redirect roughly $27 billion in outbound tourism spending back into the domestic market, while relaxed visa rules and a softer yuan are expected to draw in an additional $15 billion from inbound visitors. That’s a genuine bright spot, but it’s also a reminder of what’s actually growing: travel and experiences, not the durable-goods spending the trade-in subsidies were built to support.

Then there’s demography, which makes the 2026–2030 window unusually urgent. China’s population could shrink by close to 60 million people between 2026 and 2035, according to projections from the China-focused research firm Rhodium Group, as annual deaths climb toward 15 million a year while births keep falling — the ratio of new births to total population dropped to just 0.563% in 2025, down from 1.199% a decade earlier. Beijing’s 15th Five-Year Plan includes, for the first time, an entire chapter devoted to population policy. The retirement-age increase passed in 2024, to 63 for men and 58 for white-collar women, is expected to add roughly 0.2 percentage points to annual growth through 2030, the IMF estimates, but it does nothing to fix the underlying birth-rate collapse. For small and mid-sized exporters squeezed between soft domestic orders and rising trade friction, the math keeps getting harder, not easier.

Not Everyone Thinks the Strategy Is Failing

Not every economist reads the data this way. Standard Chartered’s Liao Wei points to China’s rising total factor productivity, climbing since 2021, as evidence the export engine can keep absorbing domestic slack without derailing growth, particularly as global appetite for AI-related hardware lifts demand for technology-intensive Chinese exports, she told China Daily. Tao Chuan, chief economist at Guolian Minsheng Securities, goes further, forecasting 2026 growth “no lower than 5%” and describing a shift toward what he calls an export-consumption equilibrium, in which subsidy-driven spending gradually gives way to sustainable services growth.

Beijing’s own assessment, delivered through the Central Economic Work Conference and echoed in Caixin’s opinion pages, holds that the economy’s fundamental trend remains positive and that 2025’s growth, officially 5%, in line with target, proves the model is working, just more slowly than critics would like.

That said, the gap between official confidence and independent estimates is wide enough to give pause. Rhodium Group’s analysts calculate that China’s real 2025 GDP growth likely landed between 2.5% and 3%, roughly half the 5.2% pace the National Bureau of Statistics reported through the first three quarters, with the biggest divergence concentrated in investment figures rather than consumption. If that estimate is closer to the mark, the resilience Beijing points to owes more to production and exports than to any genuine pickup in household spending. The picture is more complicated than either side’s headline number suggests.

A Pivot Beijing Can Postpone But Not Avoid

Strip away the subsidy cycles and the trade data, and the tension is simple: Xi Jinping wants Chinese households to spend like an advanced economy’s consumers while the state still taxes, spends and insures like a developing one. Trade-in vouchers can pull a few months of auto and appliance sales forward. They can’t replace a pension system, fix a broken property market, or convince a young professional in Chengdu that her job is secure enough to stop saving for the worst. The IMF’s own modelling suggests a serious reform package, stronger safety nets, faster hukou liberalisation, a real housing-market transition, could lift consumption’s share of GDP by roughly four percentage points over five years. That’s the size of the prize. It’s also the size of the political and fiscal commitment Beijing has so far avoided making. Until that changes, the trade-in subsidies will keep buying time rather than buying confidence, and the gap between Xi’s ambition and his households’ bank balances will keep showing up in the data, one weak month at a time.