Fiscal spending plays a pivotal role in unlocking the potential of services consumption. — Bloomberg
THE Central Economic Work Conference has made expanding domestic demand a top priority, marking it as the first of nine key economic tasks for 2025.
At the forefront of this effort is a strong emphasis on reviving consumption, a critical factor for both short-term economic stabilisation and long-term structural transformation.
However, concerns about a perceived shift from “consumption upgrade” to “consumption downgrade” seem to have arisen, fuelling anxieties about China’s consumption growth trajectory.
A more detailed analysis from a micro perspective reveals that while these concerns are understandable, they do not capture the full picture.
China’s consumer market holds immense potential, and aligning with micro-level changes in consumer behaviour is essential to better unlock macro-level potential of consumption growth.
From a macro perspective, China’s consumption patterns show some similarities with Japan, considering the dual pressures from an ageing population and real estate market adjustments.
However, China’s micro-level consumer behaviour is far more diverse.
For instance, significant differences in consumption preferences exist between the eastern and western regions of China.
Meanwhile, advances in artificial intelligence and Internet technologies are gradually bridging these gaps, creating a more interconnected market.
Our recent survey reveals that Chinese consumer preferences have undergone significant changes, influenced by the pandemic and cultural trends worldwide.
Chinese consumers are paying more attention to shopping for themselves rather than showing off purchases to others - shifting from pursuing “external display “to “internal enjoyment”.
Spending patterns indicate a decline in going out for entertainment but rising spending on health and self-improvement, alongside more selective expenditures on food and beverages.
The survey also found that consumers prefer personalised, quality products that can provide personal satisfaction.
By contrast, appearance, durability, social recognition and brand cachet are less valued.
Customised products that reflect individuality are increasingly preferred over standardised or mass-market offerings.
Consumers now prioritise products with the best value for money – the biggest bang for the buck – rather than simply seeking discounts or choosing high-priced products, showing a pragmatic pursuit of cost-effectiveness.
The balance between personal satisfaction and practicality is becoming a driving force behind purchasing decisions.
The directional revolution in consumer preferences is not merely a response to generational and societal changes, but also a structural shift tied to China’s transition from a low to a middle-income economy.
From an economic perspective, the ultimate purpose of consumption is to maximise utility. Whether this utility is reflected in a higher price or a more practical and pragmatic choice cannot simply be categorised as an “upgrade” or “downgrade”.
What matters more is understanding the psychological and behavioural changes in consumer preferences as well as the new macro trends that such shifts signify.
Fiscal spending plays a pivotal role in unlocking the potential of services consumption.
While fiscal spending is more frequently linked with investment, we have undertaken empirical research to figure out the relationship between fiscal deficits and consumption in emerging markets, including China, India, Brazil, Indonesia, South Africa and Mexico.
The results show that fiscal deficits can significantly boost household consumption over the long term.
When other conditions remain unchanged, a one percentage point increase in the fiscal deficit ratio is associated with a 0.21 percentage point rise in household consumption.
The finding underscores the importance of fiscal policy, not only in driving short-term investment, but also in stimulating consumption growth over the long run.
As the central government considers raising the fiscal deficit ratio in 2025, both consumption and investment – the twin engines of domestic demand – are expected to benefit over both the short and long term. — China Daily/ANN
Cheng Shi is chief economist at ICBC International Holdings Ltd, a wholly owned subsidiary of Industrial and Commercial Bank of China in Hong Kong. The views expressed here are the writer’s own.
