China Puts Domestic Demand at the Center of Fiscal Policy, Rewriting Its Post-Export Growth Formula

Emphasis on expanding domestic demand dominance
Clear disconnect between export indicators and consumer sentiment
Strategic pivot accelerates as growth model constraints surface

The Chinese government has formally designated domestic demand expansion as the top priority of next year’s fiscal policy. The plan to redirect fiscal spending away from infrastructure and toward consumption, livelihoods, and people-centered priorities is widely seen as an attempt to recalibrate the core drivers of national growth. With both slowing consumption indicators and the limitations of an export-dependent model becoming increasingly evident, policymakers appear to have concluded that maintaining growth targets will be difficult without strengthening domestic demand.

“Subsidy Policies Losing Effectiveness,” Critics Say

According to state broadcaster CCTV on the 29th, China’s leadership convened the Central Fiscal Work Conference in Beijing on December 27–28, where officials agreed to focus next year’s fiscal policy on expanding domestic demand, optimizing the structure of government spending, and reinforcing economic momentum. Finance Minister Lan Fo’an said after the meeting that “this year, we supported the economy more effectively through proactive fiscal policy,” adding that “an even more proactive fiscal policy will be implemented next year.” The remarks were widely interpreted as a clear signal that authorities are prepared to tolerate a certain level of fiscal deficit and debt in order to intensify spending and counter downward economic pressure.

A central theme emerging from the conference was a structural shift in fiscal spending. Chinese authorities identified “expanding the dominance of domestic demand and building a strong domestic market” as the first of six key priorities for next year’s fiscal policy. The strategy calls for moving away from infrastructure-led spending toward strengthening household consumption capacity and investment in human capital. To this end, officials plan to deepen special measures aimed at boosting consumption and to standardize policy tools, including subsidies and tax incentives. Earlier this year, China doubled the issuance of ultra-long special government bonds to approximately $41.9 billion to fund consumer goods purchase subsidies.

However, assessments are mixed on whether subsidy-driven domestic demand measures are delivering sustained results. While the Ministry of Finance has indicated that consumption subsidy programs financed through ultra-long bonds will continue next year, critics argue that the effectiveness of subsidies—now in their second year—has diminished as the year progressed. As a result, attention is shifting away from whether subsidies should continue toward how eligibility and implementation should be adjusted. Analysts note that fiscal policy must go beyond short-term spending increases and evolve into structural reforms capable of encouraging voluntary household consumption if it is to achieve its intended impact.

The decision to place domestic demand at the forefront of fiscal policy reflects a pronounced slowdown in consumption indicators. In November, China’s retail sales growth slowed to 1.3 percent year-on-year, well below the market forecast of 2.8 percent and less than half of October’s 2.9 percent increase. This marked the weakest reading since December 2022 and was particularly striking given that the month included Singles’ Day, China’s largest annual shopping event. Combined with a prolonged property downturn and mounting local government debt burdens, these trends have reinforced internal assessments that sustaining growth targets will be difficult without more aggressive domestic demand support.

Exports Hold Up, but Wallets Stay Shut

In recent years, China has displayed a clear imbalance: exports have remained resilient, while domestic consumption has failed to show a meaningful recovery. Although overall trade volumes and trade surpluses continued to expand, export gains have not translated smoothly into household income growth or consumer spending. China’s annual exports reached a record $2.47 trillion last year, yet domestic demand indicators remained largely stagnant over the same period. This has fueled concerns that a structural disconnect between exports and domestic consumption has become entrenched.

The divergence is also evident in monetary indicators. Data from the People’s Bank of China and the National Bureau of Statistics show that China’s velocity of money declined from 0.51 in 2021 to 0.48 in 2022 and 0.45 in 2023, remaining around 0.44 in 2024. For the first three quarters of this year, the figure fell further to 0.41. While money supply has increased, the pace at which it circulates through consumption, investment, and production has slowed. In September, China posted a merchandise trade surplus of $72.4 billion, yet portfolio investment recorded a net outflow of $8.0 billion, indicating that foreign currency earnings were not sufficiently recycled into domestic capital markets.

Household consumption capacity remains constrained. According to Caixin, per capita disposable income for the first three quarters of the year stood at approximately $22,900, with real growth of 5.2 percent. While broadly in line with overall economic growth, this marked a 0.2 percentage point slowdown compared with the first half of the year. Notably, property income growth lagged at just 1.7 percent, far below the overall income growth rate of 5.1 percent. Caixin attributed this weakness to falling property prices and declining financial asset returns, which have eroded household wealth effects and weighed heavily on consumption.

With consumption and investment failing to keep pace with exports, corporate profitability has also come under pressure. Persistent oversupply has intensified downward price pressure, leading to margin compression. In November, China’s industrial profits fell 13.1 percent year-on-year, the steepest decline in 14 months. As capital generation continues without sufficient circulation, concerns are growing that the overall quality of growth is deteriorating. Against this backdrop, the leadership’s decision to elevate domestic demand to the core of fiscal policy reflects a recognition that an export-centric growth model alone can no longer simultaneously sustain employment, income, and consumption.

Export-Led Model Faces Limits as Yuan Dynamics Shift

External trade conditions are also evolving in ways that make it increasingly difficult for China to rely on an export-driven strategy. High tariffs imposed under the Trump administration, combined with China’s chronic overcapacity, have distorted global trade dynamics. As low-priced Chinese goods shut out of the U.S. market have flowed into Europe and Southeast Asia, governments across regions have responded by raising tariff barriers to protect domestic industries. France, for example, has warned that additional measures could be considered in the absence of voluntary adjustments by China.

Mexico has announced plans to raise tariffs by up to 50 percent on approximately 1,400 product categories—including Chinese goods—starting in January next year, while Vietnam has already imposed tariffs on Chinese steel since July. Several emerging economies, including Indonesia, are reportedly considering similar actions. Nikkei Asia recently described this trend as “domino protectionism,” noting that China’s volume-driven low-price export strategy is triggering new trade frictions. The pattern suggests that China is entering a phase in which it can no longer rely heavily on any single export market.

China’s price-competitiveness strategy is also facing mounting constraints. Industrial subsidies are estimated at around 5 percent of GDP, enabling China to cut export prices by an average of 17 percent over the past two years while rapidly expanding production capacity. Annual electric vehicle manufacturing capacity has reached approximately 36 million units—twice domestic demand. As domestic consumption weakens, excess output is inevitably pushed overseas, creating a cycle in which price cuts erode margins and exacerbate trade tensions.

Adding to these pressures, the yuan has recently shown a gradual strengthening trend against the U.S. dollar. The exchange rate, which exceeded 7.34 yuan per dollar in early April, has recently moved closer to 7.0. While China has historically tolerated a weaker currency to support export competitiveness, recent months have seen little evidence of active depreciation efforts by monetary authorities. With the property downturn and weak consumption persisting, policymakers appear wary that further yuan depreciation could amplify volatility in foreign exchange markets.

The yuan’s recent strength also signals a broader shift in China’s growth strategy away from an exclusive focus on export volumes. In strategic industries such as electric vehicles, batteries, and solar energy, competitiveness is increasingly shaped by technological advantages and industrial policy rather than exchange rate adjustments. Moreover, as China advances its yuan internationalization agenda, excessive currency weakness risks undermining external confidence. The shift suggests that Chinese policymakers are no longer relying on exchange rate depreciation to offset export slowdowns and are increasingly cautious about the potential for currency volatility to trigger capital outflows and financial instability.