‘Hefty price tag' for subsidy scheme: is China's consumer boost sustainable?

The Star

a day ago

For months, consumers across China buying everything from iPhones to cars and washing machines have enjoyed steep discounts – courtesy of the government.
This vast subsidy programme has played a key role in boosting China's consumer spending this year, helping the economy remain relatively robust even amid an unprecedented trade war with the United States.
But in June, some of those offers suddenly disappeared. In the eastern Jiangsu province, local authorities stopped issuing vouchers for online purchases of home appliances. Around the same time, several other provinces suspended their trade-in programmes for cars and appliances, citing depleted funds.
The cancellations were the first sign that a reckoning may be approaching over China's consumption-boosting policies, which have succeeded in their main goals – but come with a hefty price tag.
Last week, Beijing reaffirmed its support for the national trade-in scheme for durable goods, pledging that the rest of the 300 billion yuan (US$41.8 billion) funding would be allocated to local governments before the end of the year, with the next two rounds of funding set to be issued in July and October.
On Thursday, Li Chao, deputy director of the National Development and Reform Commission's Policy Research Office, said the government would formulate monthly and weekly plans to monitor the utilisation of those funds. 'This will ensure the orderly implementation of the consumer goods trade-in policy throughout the year,' she added.
Yet, economists are increasingly questioning the sustainability of the policies. Though the sums involved are not a big burden for China's central government, some argue the cost of the programme may be putting more pressure on the finances of local authorities, which are already struggling under high debt levels.
Beyond that, there is also concern about the policies' diminishing return on investment. Some worry the trade-in programme may simply be pulling forward future demand, meaning the current spending binge may be followed by an inevitable hangover once the policies come to an end.
All of that has led to a growing debate over how long Beijing should continue funding the programme, especially if the US tariff war grinds on past this summer. There's the risk that sentiment simply weakens again when the rebates run out
'The trade-in scheme is a good short-term option, but it assumes that demand recovers and consumer confidence strengthens,' said Ben Simpfendorfer, a Hong Kong-based partner at the management consulting firm Oliver Wyman.
'These trade-in schemes work best when they're accompanied by structural reform that focuses on the medium term. Otherwise, there's the risk that sentiment simply weakens again when the rebates run out,' he added.
The headlines figures suggest the trade-in programme has made a real impact this year. During the first five months of 2025, China's retail sales grew 5.0 per cent year on year, up from 3.8 per cent in the last quarter of 2024, despite a turbulent global economy.
But economists from Nomura forecast that retail sales growth would fall to just 3.1 per cent year on year in the second half of 2025, due to the inevitable 'payback' from the trade-in programme, a higher base from last year, and the new austerity rules for government officials that are expected to deal a blow to the catering sector.
'In addition to providing a one-off subsidy to consumption, Beijing might need to consider longer-term structural policies to support consumption,' they said in a report published this week.
Reforms to the social security system – such as raising basic pension payments to low-income households and increasing subsidies for basic medical insurance – would be the most effective long-term policy moves to bolster consumption and reduce inequality, according to the report.
Some economists also worry about the financial strain the consumer goods trade-in schemes could place on local governments, which are required to cover a percentage of the total subsidies: 5 per cent for China's western provinces, 10 per cent for the central provinces, and 15 per cent for the eastern provinces. Given the ongoing US-China trade negotiations, the policy should be expanded rather than halted
Many local governments in China are already grappling with high debt levels and facing budgetary pressures due to a decline in income from land sales amid a downturn in the property sector.
'The overall pressure on local governments [from funding the trade-in schemes] is not too big, but for those poorest regions, they may genuinely lack the funds to cover this expense,' said Lu Ting, chief China economist at Nomura.
However, Xue Qinghe, CEO of the private Guangdong-based think tank Zhibenshe, said the trade-in programme was unlikely to impose significant pressure on local governments, as it could also boost local tax revenues.
'From the current perspective of how the trade-in programme is supporting consumption, this policy remains positive. Coupled with the ongoing US-China trade negotiations, the policy should be expanded rather than halted,' Xue said.
On Tuesday, Apple's official website in China showed that some of its products now benefitted from national subsidies worth up to 2,000 yuan, with the deals applying to purchases at the company's stores in Shanghai as well as online purchases with a Beijing shipping address. - SOUTH CHINA MORNING POST