China has introduced another set of measures meant to keep its economy moving.
Tax cuts, new infrastructure projects and easier credit for State-backed companies are being used to support growth.
Yet these steps once again avoid the country’s main problem: People in China are not spending enough. Household consumption remains weak, even as factories keep producing and governments keep building, according to a new analysis released on August 26 by Brussels-based think-tank Bruegel.
Chinese families have continued to save a large share of their income, and without stronger pensions or healthcare, they were reluctant to spend more, the study showed.
Western policymakers have for years urged Beijing to shift its focus.
Their argument has been that if Chinese households had more reliable social protection, they would feel secure enough to spend more. That would reduce the economy’s dependence on State-led investment and exports.
It would also ease trade tensions with Europe and the US, which accuse China of relying on government-driven surpluses to compete abroad.
Instead, Beijing has turned back to familiar tools. Large sums are being directed into construction, property support and industrial projects.
A key part of this is refinancing the debts of local governments, which have borrowed heavily over the past decade to pay for infrastructure.
The central government is now replacing those short-term, expensive loans with longer-term bonds of its own, a process known as “debt swaps.” This eases pressure on local authorities but shifts the burden onto Beijing’s balance sheet.
It is a temporary fix that keeps investment going rather than addressing weak household demand.
The central bank has also cut interest rates, making it cheaper for companies and municipalities to borrow.
But most of this cheaper credit still flows to state-backed projects rather than to private firms or consumers.
There are subsidies for households, such as a programme to trade in old cars and appliances for new ones, but these are limited in scale compared to the infrastructure spending.
Bruegel pointed out that while such policies can boost growth in the short term, they added to overall debt and kept the economy tied to building more infrastructure even when demand was insufficient.
A Brussels-based Egmont Institute August 29 policy brief noted these economic choices were already shaping China’s foreign relations.
One example was trade in critical raw materials. China has placed the European Union under its new export restrictions on rare earths, while reaching a separate arrangement with the US.
For Europe, this means tougher restrictions than Washington faces, complicating ties with a partner that remains one of its largest markets.
China’s weak household demand also has global effects. When spending at home is low, companies push more products abroad. That can create disputes if other countries feel their markets are being flooded with underpriced Chinese goods.
This is especially sensitive in sectors such as electric vehicles and ‘green’ technologies, where Europe and the US are trying to build up their own industries.
Bruegel warned that this imbalance risked sharpening trade tensions just as governments on both sides were relying more heavily on tariffs and subsidies to shield their industries.
Europe, meanwhile, faced its own obstacles to supporting demand. The European Central Bank wrote in a September 1 study that inflation had fallen back to around 2 per cent, its target level.
That gives policymakers more room to adjust interest rates after a period of sharp increases to contain price rises.
Monetary policy, though, is only one part of the picture. Fiscal policy — how much governments can spend — is under far greater strain.
EU member states are under pressure to bring down budget deficits after years of pandemic support and energy subsidies. At the same time, they are committing more money to defence following Russia’s war in Ukraine and to long-term investments in climate and digital technologies.
The Egmont brief underlined that these obligations are growing quickly, leaving little space for extra measures to stimulate consumption.
In practice, this means Europe’s room for manoeuvre looks much like China’s: Both want stronger household demand but both remain tied down by the weight of debt and other priorities.
This means Europe also has limited room to lift demand at home, even as it presses China to do so.
