China's Consumer Revival: A New Dawn for Domestic Spending?

The resurgence of Chinese consumer spending is a pivotal moment in the country's economic trajectory. After years of prioritizing industrial production and technological advancement, Beijing has shifted its focus towards boosting domestic demand. This strategic pivot is evident in the increased mention of "consumption" in official reports and the expansion of the trade-in scheme, which now includes a broader range of products. The government's commitment to supporting the care of elderly people and children, as well as the broader healthcare system, further underscores this shift. These measures are designed to provide a safety net for consumers, encouraging them to spend more freely.

The expansion of the trade-in scheme is a significant development. By extending the program to more products and refining procedures for claiming subsidies, the government aims to greatly boost spending on big-ticket items. This initiative is supported by ultra-long special treasury bonds valued at 300 billion yuan ($41.26 billion), an increase of 150 billion yuan over the previous year. This financial backing is crucial for the success of the scheme, as it provides the necessary resources to support consumer spending.

The government's focus on sectors such as digital and smart products, culture, tourism, and sports is another key aspect of this strategy. These sectors are expected to see faster spending growth, and the government has promised refined policies on duty-free shops to stimulate consumption. This focus on high-growth sectors is a strategic move to capitalize on the renewed spending trends and drive economic growth.

The resurgence of consumer spending is also reflected in the performance of consumer stocks. Recent research by Goldman Sachs indicates that offshore investors are optimistic about the sustainability of China's consumer recovery. Emerging market funds, previously underweight in the Chinese market, are beginning to increase their holdings in Chinese consumer stocks. On March 14, 2025, the Chinese A-share market saw a significant rally in consumer stocks, driven by expectations of favorable policies. Industries such as dairy, liquor, beverage manufacturing, food processing, and pharmaceuticals led the gains. This increased investment suggests a resurgence in consumer spending and optimism about future growth.

However, the resurgence of consumer spending is not without its challenges. The complex external environment, which could impact the country in areas such as trade, science, and technology, poses a significant risk. As Bo Zhengyuan, a partner at Plenum China Research, noted, "there's an evident expectation that U.S. technology containment measures against China will further intensify." This could lead to increased tariffs and restrictions on advanced AI chips, prompting a domestic substitution plan and potentially disrupting supply chains.

Another risk is the relatively low valuation of consumer stocks, which could lead to a "double whammy" effect if there is a turning point in business performance. Despite the recent uptick, consumer stocks remain relatively undervalued, and analysts highlight that the low valuation of these stocks could lead to a "double whammy" effect if there is a turning point in business performance. This means that companies need to be cautious and strategic in their investments and expansions to avoid potential losses.

The resurgence of consumer spending in China is a complex and multifaceted phenomenon. While the government's initiatives and the performance of consumer stocks suggest a positive trend, the risks posed by the external environment and the low valuation of consumer stocks cannot be ignored. As China continues to navigate this evolving market, it will be crucial for consumer companies to adapt their strategies and capitalize on the renewed spending trends while mitigating the potential risks.