China's Consumption Lag: A Deflationary Drag

China's economic growth has long been fueled by high savings and investment, but the country's consumption levels have remained relatively low, contributing to persistent deflationary pressures. Despite government efforts to stimulate consumption, the gap between savings and consumption continues to widen, keeping deflation in play.



China's savings rate has consistently been among the highest in the world, reaching 46.3% of GDP in 2023 (World Bank data). In contrast, the consumption rate has been relatively low, hovering around 38% of GDP during the same period. This imbalance has led to a significant current account surplus, which has been a source of global economic concern.

The Chinese government has implemented various policies to boost consumption, such as tax cuts, subsidies, and trade-in programs for consumer goods. These measures have had some success in stimulating consumption, as seen in the vibrant consumer spending data during the 2025 Spring Festival holiday. For instance, domestic travel spending reached 677 billion yuan (about 93.25 billion U.S. dollars), representing a 7-percent increase from the same period last year (Ministry of Culture and Tourism, 2025).

However, the overall consumption growth rate has remained sluggish. In 2019, the actual growth rate of consumption was 6.36 percent, a decrease of 1.7 percentage points from 2018. The contribution of consumption to economic growth was 57.8 percent, down 8.1 percentage points from 65.9 percent in 2018 (National Bureau of Statistics of China, 2020). The novel coronavirus outbreak has further exacerbated the consumption slowdown, with China's total retail sales of consumer goods declining by 16.2 percent in the first four months of 2020 (National Bureau of Statistics of China, 2020).

The low consumption rate in China can be attributed to several factors, including income inequality, demographic changes, and a cultural preference for savings. Addressing these underlying issues will be crucial for China to achieve a more balanced economic growth model and combat deflationary pressures.

First, income inequality has been a significant barrier to consumption growth. The Gini coefficient, a measure of income inequality, has been relatively high in China, reaching 0.47 in 2018 (World Bank data). To address this issue, the government has implemented policies such as the three-child policy and increased support for elderly care services to mitigate demographic pressures and maintain a stable workforce.

Second, demographic changes, particularly the aging population and declining birth rates, have contributed to the consumption slowdown. The working-age population has been declining since 2015, and the dependency ratio has been increasing (National Bureau of Statistics of China, 2020). To address these challenges, the government has been promoting high-tech investment, fostering innovation, and encouraging consumption to drive economic growth and sustain development into 2025.

Lastly, the cultural preference for savings has been a significant obstacle to consumption growth. Chinese households tend to have a high propensity to save, which has been reinforced by the government's emphasis on savings and investment as the primary drivers of economic growth. To change this mindset, the government has been promoting a shift in the distribution of income and spending, with a greater emphasis on consumption.

In conclusion, China's consumption lag has been a persistent drag on economic growth and a contributing factor to deflationary pressures. While the government has implemented various policies to stimulate consumption, the underlying issues, such as income inequality, demographic changes, and cultural preferences, remain significant barriers to consumption growth. To achieve a more balanced economic growth model and combat deflation, China must address these underlying issues and promote a shift in the distribution of income and spending, with a greater emphasis on consumption.