China doubles down on domestic demand to power economic growth

At the World Economic Forum’s Summer Davos in Tianjin, Chinese Premier Li Qiang made a bold pitch to global leaders and investors: China will not just remain a manufacturing behemoth—it is on course to become a “mega-sized consumption powerhouse”. His message comes at a time when China’s economy is battling soft consumer sentiment, deflationary trends, and intensifying global trade tensions.

As countries shift focus inward and trade frictions multiply, particularly with the US and parts of Europe, Li projected confidence in China’s ability to adapt. “China is positioned to cross cycles, move forward steadily, and inject stability into the world economy,” he said, without directly referencing tariffs or US tech curbs. Instead, he called for economic issues to be kept free from politicisation and reaffirmed China’s openness to global business.

Li’s remarks align with Beijing’s broader pivot this year toward stimulating domestic demand as a long-term growth driver. That shift has gained urgency with falling exports, growing protectionism abroad, and weak post-pandemic household spending.

Beijing unleashes financial tools to spur spending

In parallel to Li’s speech, six of China’s top government agencies released a sweeping set of guidelines aimed at using financial tools to unlock consumer demand. The policies focus on improving access to credit, raising incomes, and building confidence across the consumption chain—from manufacturing to services.

As part of a broader effort to boost domestic demand, Chinese government agencies jointly announced 19 targeted measures to strengthen financial support for consumption. Some of these measures are that banks will be encouraged to innovate credit products and expand loan access to households and consumer-focused businesses, while financial institutions will be urged to improve their internal systems to deliver more efficient consumer financing. The People’s Bank of China (PBOC) will utilise tools such as relending, rediscounting, and open market operations to lower overall financing costs. Additionally, eligible companies in the consumption sector will be supported in raising capital through initial public offerings (IPOs), bond issuance, exchange-traded funds (ETFs), and real estate investment trusts (REITs).

The central bank also unveiled a 500 billion yuan ($69.7 billion) relending facility to support elderly care and services consumption, underscoring efforts to target both demographic and sectoral trends.

Meanwhile, a government-subsidised trade-in programme for home appliances and electronics is enjoying robust uptake, with some provinces already exhausting allocated funds. The remaining 138 billion yuan (around $19.2 billion) is now being redistributed to ensure nationwide coverage.

Challenges persist: deflation, caution, and global scepticism

Despite strong retail numbers in May and the government spending hitting a three-year high in the first five months, the road to consumption-led growth won’t be easy. China’s consumer price index has declined year-on-year for four straight months, reflecting persistent deflationary pressure and subdued sentiment. Households remain cautious, particularly in light of a sluggish property market and employment concerns. To counter these issues, the government is allowing local governments to borrow more, while the PBOC has trimmed benchmark interest rates and mortgage rates to ease financial pressure.

Trade tensions remain another risk factor. While China and the US reached a fragile tariff truce in May, friction continues over rare earths, semiconductors, and tech access. In Europe, calls for tougher stances on China are growing ahead of a critical July summit.

Still, Li expressed optimism that the global economic centre of gravity is shifting toward the Global South, citing rising trade momentum in developing nations. He also highlighted China’s multilateral diplomacy push, pointing to the recent establishment of the International Organization for Mediation in Hong Kong with 32 other countries.

China is making a concerted effort to reposition its economy from an export-driven model to one that leans heavily on domestic consumption. While the transformation is far from complete, recent policy moves suggest a high-level commitment to this structural pivot.