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On March 14, China’s National Financial Regulatory Administration, the country’s top financial regulator, urged Chinese banks to expand consumer loans as part of Beijing’s attempt this year to boost consumption. According to the State Council’s website, “China has announced a raft of measures to optimize consumer finance, aiming to stimulate consumption and improve financial services.”
As Chinese banks responded by cutting interest rates on consumer loans, an Associated Press article provided a little more color:
China has ordered banks and other financial institutions to encourage more consumer financing and use of credit cards as part of a campaign to get people to spend more. The order Friday from the country’s financial regulator is part of the ruling Communist Party’s latest push to build more confidence among consumers who are opting to save rather than spend, worried over jobs and the outlook for the economy.
Some context here can be useful. In the all-important “Two Sessions” meetings earlier this month—the collective term for the annual plenary sessions of the National People’s Congress and of the National Committee of the Chinese People’s Political Consultative Conference—Beijing made raising consumption its top economic strategy for 2025.
Of course, Beijing has been talking about boosting consumption in China for years, as the country’s burgeoning trade surplus—and the reaction from the rest of the world—have made it clear just how overreliant China has become on net foreign consumption to drive growth. But the fact that consumption is now at the center of Beijing’s economic policy strategy is widely considered to be significant, even if it reflects recent failures to sufficiently boost consumption despite the central and provincial governments’ determination to do so.
To get an idea of just how badly China performed in 2024, it’s worth noting that for all the talk and rhetoric, the role of consumption in driving economic activity last year was actually weaker than it usually is, despite what a recent Xinhua article suggested:
Vowing to make domestic demand ‘the main engine and anchor of economic growth,’ China’s policymakers have sent fresh and firm signals on empowering the vast number of consumers to spend, countering skepticism about the country’s shift toward a consumption-driven economy.
Boosting consumption is hardly a fresh concept in the Chinese policy toolbox, and consumer spending has played an increasingly vital role in China’s economy. In 2024, final consumption contributed 44.5 percent to China’s economic growth, surpassing investment and exports, and drove GDP up by 2.2 percentage points.
It is a strangely worded article, because for all the boasting about Beijing’s success in boosting the “increasingly vital role” of consumption, the data indicates the opposite. A final consumption contribution of 44.5 percent to China’s economic growth equates to one of the worst performances ever. In the past eleven years, only 2020 was a worse year, when consumption growth was negative because of the COVID-19 pandemic.
Even with that year excluded, the consumption contribution to GDP growth on average during the previous ten years was just over 53 percent. When excluding 2020–2024 because of COVID-related distortions, the average was nearly 61 percent.
Last year, in other words, China carried out an impressively bad attempt to make consumption play a more important role in driving growth in the Chinese economy. Simple arithmetic bears this out. With consumption currently comprising roughly 56 percent of GDP, the consumption share of GDP can only rise in years in which the consumption contribution to growth exceeds 56 percent. Because it came in more than ten percentage points lower last year, the consumption share of GDP actually declined in 2024.
If China is to rebalance in a meaningful way and increase the consumption share of GDP in ten years by ten percentage points, consumption must contribute an average of at least 80–85 percent of GDP growth every year (and much more if growth slows). Even if China were able to do this, at the end of the ten-year period, it would still be among the lowest consuming economies in the world—despite the level of GDP contribution being roughly twice what it was last year.
A Higher Consumption Share Means a Lower Saving Share
The poor performance in 2024 is probably why Beijing is taking the need to raise the consumption share of GDP so seriously this year. If Beijing is indeed effectively pressuring banks to expand consumer loans, and if banks are responding aggressively to this pressure, the result may be significant and bode well for economic growth in the short term.
For one thing, increasing consumer lending is certainly one way to reduce the excessively high household savings rates that is part of China’s weak consumption story. Household borrowing, after all, is just negative saving, and either reducing household savings or increasing household loans could increase the consumption share of GDP without undertaking the more difficult task of increasing the household income share of GDP.
Many analysts argue—correctly—that Chinese household savings have been higher in recent years because Chinese households feel worried about the future and, in response, are saving more. But these analysts also say that this is why pressure to expand consumer lending must fail—as the households will only borrow in order to pay down more expensive debt.
This, however, is the wrong way to look at the situation. The argument views households as a single entity, when in fact, in China, like in any economy, households are a very mixed group, with normal variation in risk-taking, optimism, and even foolishness. Many households are happy to borrow to increase current consumption, and if they are not doing so, it only means that they are unable to, perhaps because banks have made lending standards too high or borrowing rates too expensive.
If banks were to decide to market consumer loans more aggressively, especially by lowering lending standards or borrowing rates, they would always be able to find households willing to borrow to consume. Households in the aggregate may have become more cautious, but it doesn’t mean that every household has become more cautious.
But while encouraging more consumer lending may help boost consumption in the short term, it mostly does so by moving future consumption forward. This could create a problem if it simply moves consumption that would have occurred anyway a few months forward. The benefits today would be erased by the costs tomorrow.
Beijing regulators almost certainly understand this. They also understand that this isn’t necessarily a zero-sum process if more consumption today leads to more high-quality growth tomorrow (and it almost certainly will), leading businesses to expand production, which in turn means hiring more workers and paying higher wages. If this effect is strong enough to boost household confidence, it can push the economy into a self-reinforcing process of stronger growth leading to higher incomes and higher incomes leading to stronger growth; this is how countercyclical policies are supposed to work.
But if debt-funded consumption doesn’t permanently boost household confidence, more of it today will be balanced by less consumption tomorrow, as households pay down the debt. In that case, the boost to consumption will simply be temporary, reversing later in the year or next year.
Secondary Impacts
Because Beijing will likely get Chinese banks to expand consumer lending, it’s worth discussing at least three secondary impacts of such an expansion. First, Chinese banks are already suffering from record low net-interest margins, and as they try to expand consumer lending with lower lending rates, a price war among banks in certain provinces may exacerbate low net-interest margins. A recent Bloomberg article explains:
Chinese banks are slashing rates on consumer loans to record lows as policymakers ramp up stimulus to stabilize growth and counter US President Donald Trump’s tariffs. Lenders across the wealthier areas of Shanghai, the nation’s financial capital, and Hangzhou, a key tech hub, are engaged in a price war, offering annual interest rates as low as 2.58% on loans to fuel restaurant visits and shopping, according to online ads. That compares to rates as high as 10% about two years ago.
Lower net-interest margins will make it harder to absorb rising nonperforming loans, and if these rise, they will make the need to recapitalize the Chinese banking system all the more urgent.
This obviously leads to the next secondary impact. Competition to expand consumer loans generally means that banks will take on lower-quality credit. Nearly every time that regulators have demanded that Chinese banks expand consumer lending, there has been a deterioration in credit quality. The ability of the banks to sustain aggressive consumer lending will depend on how quickly credit quality deteriorates.
The third impact will be on the Chinese stock market. While the purpose of an expansion in consumer loans will be to boost consumption, previous experiences suggest that at least part of these new loans will end up financing stock-market purchases. This should fuel further rises in Chinese stocks over the rest of 2025, especially given that the stock market is likely to see any resulting increase in consumer spending as very good news.
To summarize, if Chinese banks respond aggressively to pressure from regulators to expand consumer lending, and do so to a substantial extent, this could be quite beneficial in the short term. In boosting the role of consumption in driving growth—while evading the costs of a more fundamental redistribution of income—the quality of Chinese growth will improve in the short term and there will be additional upward pressure to the stock market.
Over the longer term, however, what will matter is the impact of these positive short-term outcomes on overall confidence. If the outcomes permanently raise household (and business) confidence, they won’t necessarily lead to faster growth, which is largely set by Beijing in the form of GDP growth targets, but rather to higher quality growth, which in China’s case is much more important than the level of GDP growth.
That’s because to the extent that consumption plays a bigger role in China achieving its 5 percent GDP growth target, investment can be allowed to play a smaller role; and in China, that almost certainly means less nonproductive investment. If consumption does play a bigger role in achieving the growth target and hence investment plays a smaller role, GDP growth will still be 5 percent but it will be more sustainable.
