GOOD MORNING FROM LONDON
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CHINA’S DOMESTIC CONSUMPTION
- A big issue with the Chinese economy recent years has been the problem of underperforming domestic consumption.
- This matter has been comprehensively addressed recently in the South China Morning Post by Lu Feng – Emeritus Professor of Economics at the National School of Development (NSD) at Peking University. His contribution is recommended for people looking to understand more about the direction of China’s Economy. Economics has a poor public reputation – it is dry and statistic oriented – but it can be very interesting and it is the clue to a clearer understanding of developments in China. As you read the article it is good to bear in mind that China’s annual economic growth remains at 5% – a figure Western economies would be pleased to achieve.
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In his recent interview with the South China Morning Post Prof Lu Feng made some topical comments about the issue of Internal Consumption (IC). Here follows the first part of an abbreviated but unabridged narrative of the Interview. The headings in bold have been added.
SHALLOW INTERNAL CONSUMPTION
“Consumption growth in China has been relatively slow, due to a fall in public confidence after the Covid-19 pandemic. There are other reasons – income distribution, China’s social security system and the hukou [household registration] system. The issue is important because shallow internal consumption is a significant obstacle to economic progress.
China has excelled in technology, supply, productivity and production. This has led to rapid growth but insufficient final demand and weak consumption is undermining economic growth.”
CONSUMPTION IN CHINA’S CITIES
“Data shows that consumption in China’s major cities, as represented by Beijing and Shanghai, appears particularly weak. Beijing might be a special case because it had several major events this year, such as the 3 September military parade which restricts daily consumption for certain periods. Additionally, as the capital, Beijing has a long-term goal of reducing its permanent population and transferring it to areas such as Xiongan in Hebei Province
The pandemic in the cities did lead to significant control measures because of their high population density and the greater risk of rapid Covid spread. Service industries which were active and expanding sectors were particularly badly affected.
The Professor had researched labour issues and highlighted as an example of current problems the case of one young person who had planned to learn hairdressing or culinary skills and then enter the city’s service sector. However, the pandemic hit, and he graduated but couldn’t find those jobs, so he had to return to factory work instead. This illustrates how young people’s career choices are closely linked to broader economic patterns and conditions. The service sector took a hit and resulted in an excess of supply of desperate youngsters looking for work in trip-hailing and food delivery. The increase in consumption associated with the expansion of the cities of China did not occur.”
GOVERNMENT ANTI-CORRUPTION MEASURES
“There is also a suggestion that Government-led anti-corruption measures discouraged dinner entertaining and caused hardship to the restaurant sector. Whilst anti-corruption efforts and political discipline are necessary to prevent extravagance, they also can have a negative effect on consumption and, also, on the social atmosphere of cities – fewer people on the streets.”
OUTDOOR BARBECUES
“And in relation to outdoor barbecuing – does it seriously pollute the atmosphere? Environmental policies should be always evaluated for their impact on macroeconomic growth before implementation but, again, have the authorities achieved the right balance between pollution on the one hand and increased consumer spending on the other?”
TRADE-IN GOODS
“Beijing is aware of the need to boost consumption and is making available subsidies for consumer goods trade-in. Last year, 300 billion yuan (US$42.1 billion) was allocated for consumer goods trade-ins and corporate equipment upgrades. This year, the funding has effectively doubled, with an additional 300 billion yuan in ultra-long-term special bonds dedicated to each of these two areas. This scale of support is considerable.”
CHILDBEARING SUBSIDIES
“In addition, some longer-term policies are being implemented, such as subsidies for childbearing and support services for disabled or elderly people. This may have the additional goal of increasing population at a time when China’s population is growing at a lower rate”
ARE THESE POLICIES EFFECTIVE?
“It was estimated that the extra consumption generated by the consumer goods trade-in policy this year contributed to perhaps over 1 percentage point for the overall consumption growth rate.
But the policy has not fully addressed the root of the problem. From January 2025 to September 2025, retail sales of goods amounted to 32.49 trillion yuan, up by 4.6 per cent year on year. But in the single month of September, retail sales of goods increased only by 3.3 per cent, and if the portion driven by trade-in programmes is excluded, the remaining year-on-year growth rate was just 1.5 per cent that month. Moreover, the trade-in programme has front-loaded demand in these categories, meaning that consumption in related areas may weaken in the period ahead.
It suggests that behind weak consumption lie deeper structural issues. Unless these causes are addressed, stimulus policies may have some effect, but they cannot resolve the fundamental problem.”
Professor Lu noted that structural factors affecting consumption growth, such as the household registration system and social security issues, needed reform but progress has been slow. Why?
“Here, we need to define the public sector: it is broader than just the government, and includes state-owned enterprises (SOEs) and public institutions providing various services. These three components together control a pool of resources that is significantly larger than fiscal resources alone. Based on data from 2023, the resources managed by the public sector are estimated to account for over 45 per cent of gross domestic product. Therefore, how these resources are allocated has a crucial impact not only on economic growth but also on structural balance within the economy.
In simple terms, while resource allocation touches upon many areas, the majority is still channelled through various forms of investment, primarily focused on boosting technological progress and industrial development, which is the supply-side capacity.”
As massive resources from both the public sector and private investment are channelled towards the supply side, coupled with the improved efficiency of supply investment, the pace and speed of supply expansion have greatly increased. But, conversely, consumption is fundamentally unable to keep up with the growth in supply and this leads to supply exceeding demand, resulting in overcapacity and low profits.”
THREE POLICY INSTRUMENTS
“In the past, this issue was addressed through three policy instruments.
First; promoting investments to achieve the objectives of upgrading industrial structure and boosting short-term demand.
Second; since Zhu Rongji’s administration, more than two decades ago, there have been determined efforts to cut overcapacity – now referred to as anti-involution.
Third; expansion of exports utilising external demand which alleviates the problem of supply exceeding demand caused by weak final consumption.
But these old pathways have become increasingly difficult to pursue. China’s industrial structure has reached a more advanced stage, exports have reached a high surplus level, and yet the return on investment continues to decline. This is mainly because weak demand prevents goods from fetching good prices, leading to shrinking profits.
The return on investment is actually the most important indicator guiding rational investment across society. When returns on investment are poor, people are naturally reluctant to invest more – it’s simple logic. So, who invests under such conditions? The government does, because the government does not always prioritise profitability. It may invest in projects that are temporarily unprofitable to maintain macroeconomic stability, often in infrastructure.
Such investments can sometimes be reasonably ahead of demand. However, if consumption remains persistently weak and there are not enough users of this infrastructure, the returns on such investments will also weaken over time, making this approach difficult to sustain in the long run.”
BOOST CONSUMPTION
“Although overall consumption remains sluggish, there are still some bright spots among urban groups with higher pensions or incomes – for example, the surge in travel during national holidays. However, the position is different in rural areas where a population of several hundred million people is less inclined to travel. Therefore, the economy needs to be rebalanced and rationalised.
It is necessary to boost the confidence of the middle and high-income groups, making them willing to spend, and, at the same time allocate resources to low-income groups to give them the capability to consume.”
RETIREMENT
“There is actually no formal concept of retirement in rural China – the elderly keep working until they can no longer do so, because the pensions they receive are extremely low. It is also a crucial factor in supporting consumption.
By the measure of the permanent resident population, there are still about 500 million people in rural areas, while the population registered to rural households is over 700 million. So, if the consumption of this segment can be increased, the effect on overall consumption would be significant.”
PENSIONS MATTER
“Consumption is, in essence, an income issue. Income can be divided into transitory and permanent income, and raising people’s permanent income is particularly important for boosting consumption. In modern societies, this is why having a social security system is necessary. The government needs to establish institutional arrangements to ensure a basic level of income for certain groups, and this is related to the increased uncertainties in a market economy. Moreover, as life expectancy increases, the period requiring pension support also lengthens.
A significant proportion of income increases may need to be secured through government redistribution. For instance, 30 or 40 years ago, it was more important for people to explore opportunities and seek income within the market economy – which was objectively correct and successful. Thanks to the unleashed potential of the market economy, China’s per capita income has greatly increased.”
SOCIAL SECURITY
“However, in the current situation, while the vitality of the market economy remains, some people still lack the ability or willingness to consume. Prof Lu Feng believes this is largely a policy issue. For example, in terms of social security, if farmers were provided with a slightly higher and more stable pension standard, their permanent income would effectively increase. Suppose they currently receive about 200 yuan (US$28) per month – if that were raised to 1,000 yuan, their consumption behaviour would certainly change.
In rural areas, many elderly people who still work can only earn enough for basic subsistence – not enough to change their consumption structure. Without support from their children and relying solely on themselves, they can barely make ends meet. If the state has the capacity and conditions, it should provide them with more.
Some may ask: if the state gives money to rural residents, might they just save it instead of spending it and thereby defeat the purpose of the expansionist programme? That is quite possible, especially if it is a one-time payment or transitory income growth. Economic common sense predicts that one-time income growth will mostly be saved. However, if the income growth is expected to be long-term and permanent, overall consumption will rise, and this would also boost the level of common prosperity”.
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EXTRACT #1
RE JAPAN – CHINA POSITION EXPLAINED
PEARLS AND IRRITATIONS
“When Japanese Prime Minister Sanae Takaichi told parliament that a Chinese military move against Taiwan could constitute a “survival-threatening situation”) for Japan, some big Western media outlets uniformly framed China’s furious response as irrational overreaction.
The New York Times called it a return to “Woolf Warrior diplomacy.” The Wall Street Journal dismissed Beijing as “picking a fight.” The Age characterised it as a “fire hose of Chinese rage over three words.”
What none of these outlets adequately explained is why those three words matter so much – and why their failure to provide this context represents a dangerous form of historical amnesia that distorts our understanding of East Asian security dynamic.
To China, the conceptual framework of “existential threat to Japan’s survival” directly echoes the justification language Imperial Japan employed for its most catastrophic acts of aggression in the 20th century.”
GRAHAM PERRY COMMENTS;-
On 6 September, 1941, Imperial Japan’s Cabinet issued an official decision stating: “Our Empire, for the purpose of self-defence and self-preservation, will complete preparations for war.” This declaration set the stage for Pearl Harbor three months later. The same “existential threat” language justified the 1931 invasion of Manchuria and the broader assault on China that would claim 15-20 million Chinese civilian lives.
Pearls & Irritations notes that the Western media makes no mention of the Nanjing Massacre, where 200,000-300,000 civilians were murdered. No reference to Unit 731, which performed brutal biological experiments on living humans. No acknowledgment of the “comfort women”— hundreds of thousands of women forced into sexual slavery. No discussion of the “Three Alls Policy” (kill all, burn all, loot all) that devastated Chinese villages. Nothing about the tens of millions Chinese civilians killed, raped and mutilated.
It is roughly equivalent to a German chancellor using “Lebensraum” rhetoric while discussing military contingencies in Eastern Europe. This is not grand standing by China. There is real, genuine, deep seated anger in China.
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EXTRACT#2
CHINA-JAPAN TIES WORSEN
NIKKEI ASIA
“As tensions between China and Japan continue to flare over a comment on Taiwan by Japanese Prime Minister Sanae Takaichi, the pain is spreading to the travel industry and beyond.
A travel agency affiliated with a Chinese state-owned enterprise said Monday that already-sold tours to Japan would depart as scheduled but that new reservations had been halted. As of that evening, its website was no longer listing tours to such destinations as Tokyo, Kyoto and Hokkaido.
Chinese media reported Monday that the releases of at least two Japanese movies in China had been postponed, including the new “Crayon Shin-chan” animated film previously due out Dec. 6.
Chinese subsidiaries of some Japanese companies have reported that meetings with Chinese counterparts have been postponed. Business trips to Japan have also been cancelled in some cases, Chinese media report.
GRAHAM PERRY COMMENTS;-
The China Government have sharply criticised the comments of Prime Minister Takaichi. Additionally, the China media report that the release of at least two Japanese movies has been postponed including the new “Crayon Shin-chan” animated film previously due out Dec. 6. China’s numbers matter in the costing of new foreign films.
The UK Guardian newspaper reports on 18 November that “shares in Japanese tourism and retail companies have fallen sharply after China warned its citizens not to travel to Japan…Takaichi suggested that Japanese self-defence forces could intervene if a Chinese attempt to invade Taiwan represented a ‘survival threatening situation’ for Japan…Shares in the Japanese cosmetics business Shiseido fell 9%, in the department store group Takashimaya by more than 5%, and in Fast Retailing by more than 4%. China is the biggest source of tourism to Japan with Chinese travellers spending large sums on cosmetics, clothes and consumer goods”
The Guardian concludes; “Under a joint communique in 1972 that normalised bilateral relations, Japan ‘fully understands and respects’ China’s stand that “Taiwan is an inalienable part of the territory of the People’s Republic of China”.
Is it a case of the inexperience of Japan’s new PM? Possibly, but China will not take any chances so expect a full blast from Beijing.
Taiwan, as Xi told Trump in Seoul, is China’s #1 issue.
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CHINA AND JACK PERRY PART 22
PART 21 ENDED AS FOLLOWS;-
“Here occurs an interesting encounter. The American representative on the Board was Solomon (Sol) Adler who started life in Bradford in the UK. Sol was from an orthodox Jewish family. His elder brother was a prominent Professor of Tropical Medicine at Tel-Aviv University. Sol himself settled in China in 1960 and was amongst a small group of venerated individuals who were responsible for finalising the English translations of the Collected Works of Mao Tsetung. More on Sol Adler is future chapters – he tells of an interesting exchange with Mao in 1963 which in retrospect is an indication of the approaching Cultural Revolution.
We will get to everything in time.
The China and Jack Perry story is rapidly becoming a story of two men – Jack Perry and Dr Ji Chaoding. The narrative reflects the respective journeys of both men – Jack beginning in Hackney London in 1914 and Dr Ji beginning in Shanxi in 1903. They met in 1951 when both attended in Copenhagen for a meeting of the Preparatory Committee for the Moscow International Economic Conference of 1952. They met again in Warsaw for a second Preparatory Committee Meeting and then in Moscow 1952 at the Conference.
At that time the two men had different goals. Jack, a manufacturer of ladies clothing in London was Secretary of the British Delegation to the 1952 Conference. His role was twofold – first, to promote East-West Trade at a time of great international tension. He was a member of the UK Communist Party and wanted to play a part in breaking the trade embargo imposed by the U.S. on the USSR. The Cold War was very Cold. Second, Jack sought to promote his own dress business and find new markets for his products which had, hitherto, been sold only in the UK.
Dr Ji also had two goals. First, he was one of the leading members of a delegation from the new China – inaugurated only in 1949 – appearing for the first time on the international stage. He had a second goal; he had been instructed by his boss Premier Zhou Enlai to find new reliable trade partners for long term association. Dr Ji was looking for individuals – people whom he assessed as being capable of working in long term partnership with China to promote trade and investment.
Unknown to Jack, Dr Ji had been doing his homework. Ji was no novice. As the narrative on his career has made clear he had two quite different roles. At one level he was an economist of standing in the academic world. He studied in the U.S. at Chicago University. He became a part of the University’s teaching staff and was appointed a Professor. He also pursued a commercial career as an adviser to the H.H. Kung, the Finance Minister of the Kuomintang. His second role? – Dr Ji was also an underground member of the Communist Party of China.
Through his work in Economics, Dr Ji had come to know Joan Robinson of Cambridge University who worked closely with John Maynard Keynes and who subsequently became a Professor of Economics at Cambridge. Ji sought Joan’s guidance on individuals to become a long-term business associate of the New China and Joan, unhesitatingly, recommended Jack Perry.
Jack and Ji met for the first time in Copenhagen and Ji, without disclosing his real intentions watched Jack at work on the Preparatory Committee in the meetings in Copenhagen and Warsaw and at the 1952 Conference when he came to the conclusion that Jack was his man for the long term with China. The moment came towards the end of the Conference when Dr Ji, together with Mr Lu Hsuchang, knocked on the door of Jack’s hotel room and made the business proposal.
Jack and Dr Ji had much that separated them – Jack was from the UK, Ji was from China. Jack left school at the age of 14 and lacked a University education, whereas Ji had a full school education and had become a Professor of Economics. But they had things in common as well. Both were self-made individuals with ability and ambition. Both were undisclosed members of their respective countries’ Communist Party and something that has hitherto been overlooked – both had Jewish wives. Doris was Jewish in the UK and Harriet was Jewish in the U.S.A. Neither Jack nor Ji had any religious commitments – both were atheists but they both had knowledge and awareness of Jewish culture and the Jewish story – Jack in the UK and Dr Ji in the U.S.
I do not want to overplay the significance of the Jewish common ground but Ji, when in the U.S. spent time with the left wing Philip Jaffe, the brother of his wife Harriet. Ji also spent time with Jack who, despite being an atheist, was a very knowledgeable and informed Jew who had excelled in Jewish studies at school and at synagogue in his youth.
In Part 23 I will return to the career of Dr Ji and his remarkable work – notwithstanding his secret membership of the China Communist Party – as Secretary and Adviser to H.H. Kung, the Finance Minister of the KMT. The narrative will then revert to Jack and his early visits to China which are recorded in his contemporary letters to Doris and we children.
GRAHAM PERRY.
