On February 1, U.S. President Donald Trump took a step toward implementing a campaign promise by signing an executive order to levy tariffs on the United States’ three largest trading partners: Canada, Mexico, and China. China was the only one of the three unable to delay or avoid implementation of those tariffs – and it may have the most to worry about.
After all, Trump’s order added a 10 percent tariff on top of the existing 25 percent tariffs on many Chinese exports. He also closed a loophole that enabled Chinese e-commerce firms like Shein and Temu to sell cheaply to American consumers by avoiding duties altogether. What is more, Trump has not ruled out acting upon, at a later date, his initial promise to implement a 60 percent tariff on Chinese exports to the United States, creating additional uncertainties for Chinese manufacturers.
These grim prospects are no doubt renewing the call among many for China to pivot toward boosting domestic consumption, lest it attract even further scrutiny abroad. With the trade surplus hitting a historical high in 2024, China has faced criticism from other major trading partners like the European Union for boosting growth by allegedly dumping cheap exports in foreign markets. The EU’s move to also apply tariffs on Chinese EVs heralds a new era in which the geopolitical environment, rather than the economics of production and quality of goods, can determine how much and where China can peddle its wares. In such an environment, selling to domestic consumers becomes more attractive given the potential stability of the market.
According to this line of thinking, China’s massive manufacturing sector need not shrink when pivoting to the domestic market, given how much more the country’s consumers can still consume. Chinese private consumption only makes up 39.2 percent of GDP, versus 67.7 percent in the United States. A quick back-of-the-envelope calculation shows that this difference in percentage leads to the U.S. having a private consumption total of more than 2.66 times that of China, even with a GDP only 50 percent larger and a population quarter the size. Bringing China’s private consumption level to that of the United States, even without further GDP growth, could add more than $5 trillion to the Chinese economy, nearly 30 percent of China’s $17.79 trillion economy and more than its entire manufacturing output of $4.67 trillion in 2024.
However, a closer look at the purchasing power of Chinese consumers quickly dispels any argument that Chinese need to spend more of their income. Official data from the Chinese government show that the country’s per capita disposable income is a mere $5,511, a far cry from the United States’ $63,668. Using these figures, we can see that, whereas the average American’s private consumption is 86.87 percent of their disposable income, the equivalent figure for the average Chinese is actually higher at 89.68 percent. Contrary to popular belief, Chinese consumers already spend much more of what they earn than their American counterparts.
So what explains China’s consistently high household savings, which reached a record of $19.13 trillion at the end of 2023, or at approximately $57,120, more than ten times the disposable income? The Chinese consumer’s higher level of savings relative to income must be understood in conjunction with higher levels of debt that they also incur, requiring the setting aside of extra income for future repayments. Total household debt in the United States stands at $17.943 trillion, roughly $51,200 per person, or 80 percent of the disposable income, allowing the average American to scrape by with a 3.80 percent savings rate. The equivalent figures for China are $11.347 trillion in total household debt, working out to $8,040 per capita and 146 percent of average disposable income. In other words, it’s necessary for Chinese consumers to forego most impulse purchases.
Thus, to wring more out of Chinese consumers requires the hard work of greatly increasing the per capita disposable income. It is here that the Chinese economy shows much more potential. Whereas disposable income in the United States represents nearly 78 percent of the country’s per capita GDP, in China, the figure is only 43.7 percent. More efforts should be expended on ensuring that the average Chinese citizen directly enjoys the fruits of the country’s economic growth, through higher wages and growth in their assets’ values.
To be sure, the Chinese government has taken direct measures, like increasing pension payouts and subsidies on medical insurance to boost disposable income. However, given the sheer scale of the hidden local government debt it needs to tackle, the Chinese government does not have the fiscal leeway to finance a dramatic increase in disposable income. Instead, Chinese private businesses that have historically had little expectation of selling to foreign customers, including those in domestic tourism, food and beverage, and even IT firms selling direct-to-consumer services, should do more to boost wages and job openings.
To be sure, the efforts of both the government and private businesses will face headwinds. With the youth unemployment rate stubbornly high at more than 17 percent and consumer confidence continuing to hover near a record low, there is plenty of downward pressure on both wage levels and sales revenues for even the firms most insulated from the tit-for-tat tariffs in the ongoing trade war. Yet, by making it clear that the shortfall of Chinese private consumption is rooted not in the overzealous savings of the Chinese consumer, but the inadequate compensation they receive in the first place, the public’s pressure can be more focused on policymaking and corporate behaviors that encourage workers’ financial welfare.