• Research
  • Emissary
  • About
  • Experts
Carnegie Global logoCarnegie lettermark logo
DemocracyIran
  • Donate
{
  "authors": [
    "Michael Pettis"
  ],
  "type": "legacyinthemedia",
  "centerAffiliationAll": "dc",
  "centers": [
    "Carnegie Endowment for International Peace",
    "Carnegie China"
  ],
  "collections": [],
  "englishNewsletterAll": "asia",
  "nonEnglishNewsletterAll": "",
  "primaryCenter": "Carnegie China",
  "programAffiliation": "AP",
  "programs": [
    "Asia"
  ],
  "projects": [],
  "regions": [
    "East Asia",
    "China"
  ],
  "topics": [
    "Economy"
  ]
}

Source: Getty

In The Media
Carnegie China

China's Next Stage: Consumption vs. Employment

China’s present model of economic development forces households to subsidize large amounts of often inefficient investment. If Beijing sticks to this policy, domestic consumption will continue to stagnate and constrain overall growth.

Link Copied
By Michael Pettis
Published on Oct 1, 2009
Program mobile hero image

Program

Asia

The Asia Program in Washington studies disruptive security, governance, and technological risks that threaten peace, growth, and opportunity in the Asia-Pacific region, including a focus on China, Japan, and the Korean peninsula.

Learn More

Source: New York Times

China's Next Stage: Consumption vs. EmploymentEDITORS: China celebrates 60 years of Communist Party rule this week. But devotion to a socialist ideology seems to have been replaced by pride in rising standards of living and the ability to go shopping, at least in the glittering precincts of Shanghai and Beijing. The Chinese government is expanding subsidies for consumer spending on home appliances. Retail sales during the eight-day national holiday are expected to soar, and 560 million people are expected to travel in China during this holiday week.

Is China, 30 years after its opening to the West, becoming a consumer society? What policies might help in that transformation, and what are the consequences for other nations?

PETTIS: The Chinese are already eager consumers, eager to buy many of the same things that Western consumers buy — with an especial fondness for overpriced brand labels. Any visit to the throngs of wistful window-shoppers in Beijing’s Wanfujing or Shanghai’s Nanjinglu, the country’s premier shopping streets, will make this very obvious. So why are the Chinese consuming at what may well be the lowest rate as a share of G.D.P. ever recorded?

Consumption growth in any country is necessarily limited by the growth in household income and wealth, neither of which has grown nearly as rapidly in China as the country’s economy. China’s development model is a steroid-fueled version of the classic export-led model common to many high-saving Asian countries. This model involves systematically subsidizing production and investment, often leading to very inefficient investment.

Of course subsidies must be paid for, and in China households pay for them in the form of taxes and low wage growth, among other factors. Increasing the growth rate of the economy through investment subsidies paid for by households reduces the share of consumption in the overall economy.

Since the contraction of the U.S. trade deficit almost certainly means that in the medium term China’s growth will be limited by its domestic consumption growth, Beijing has embarked, almost desperately, on a number of policies to goose domestic consumption.

Will these policies work? Perhaps in very specific cases they will cause consumption to increase, but in general Chinese consumption is unlikely to accelerate unless the government reverses policies that forced households to subsidize inefficient producers. But reversing those policies would almost certainly cause unemployment to rise in the short term.

So Beijing is doing the opposite. To prevent rising unemployment caused by the collapse in exports, Beijing has increased the subsidies and support for domestic manufacturing while sharply increasing China’s already-record-breaking levels of investment. It is almost certain that much of the new investment will generate low or even negative returns.

This will not help rebalance the economy. As long as Chinese households must subsidize large amounts of inefficient investment, it will be hard for consumption to take off.

About the Author

Michael Pettis

Nonresident Senior Fellow, Carnegie China

Michael Pettis is a nonresident senior fellow at the Carnegie Endowment for International Peace. An expert on China’s economy, Pettis is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets. 

    Recent Work

  • Commentary
    What GDP Means in a Soft Budget Economy Like China

      Michael Pettis

  • Commentary
    What’s New about Involution?

      Michael Pettis

Michael Pettis
Nonresident Senior Fellow, Carnegie China
Michael Pettis
EconomyEast AsiaChina

Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.

More Work from Carnegie Endowment for International Peace

  • Commentary
    Southeast Asia’s Agency Amid the New Oil Crisis

    There is no better time for the countries of Southeast Asia to reconsider their energy security than during this latest crisis.

      Gita Wirjawan

  • Commentary
    Fuel Crisis Forces Politically Perilous Trade-Offs in Indonesia

    As conflict in the Middle East drives up fuel costs across Asia, Indonesia faces difficult policy trade-offs over subsidies, inflation, and fiscal credibility. President Prabowo’s personalized governance style may make these hard choices even harder to navigate.

      Sana Jaffrey

  • Commentary
    Emissary
    In Its Iran War Debate, Washington Has Lost the Plot in Asia

    The United States ignores the region’s lived experience—and the tough political and social trade-offs the war has produced—at its peril.

      Evan A. Feigenbaum

  • Commentary
    China Financial Markets
    What GDP Means in a Soft Budget Economy Like China

    The GDP measure is an attempt to measure value creation in an economy. This measure, however, can vary greatly between economies that have disciplinary mechanisms that force them to recognize investment losses quickly and economies that don’t, and can postpone this recognition for many years.

      Michael Pettis

  • A White man in a tan jacket stands with his back to the camera, plugging in an electric car to a row of green and white chargers.
    Commentary
    Emissary
    Some Countries Are Better Prepared for an Energy Crisis This Time

    As the Iran war shocks oil prices, countries that have invested in renewables, EVs, and battery development since the 2022 Russian invasion of Ukraine are seeing the value of their investments.

      • Noah  Gordon ​​​​

      Noah Gordon

Get more news and analysis from
Carnegie Endowment for International Peace
Carnegie global logo, stacked
1779 Massachusetts Avenue NWWashington, DC, 20036-2103Phone: 202 483 7600Fax: 202 483 1840
  • Research
  • Emissary
  • About
  • Experts
  • Donate
  • Programs
  • Events
  • Blogs
  • Podcasts
  • Contact
  • Annual Reports
  • Careers
  • Privacy
  • For Media
  • Government Resources
Get more news and analysis from
Carnegie Endowment for International Peace
© 2026 Carnegie Endowment for International Peace. All rights reserved.