China's $42 Billion Stimulus: A Short-Term Boost with Long-Term Risks

The Chinese government has launched a massive consumer stimulus campaign, reportedly injecting over $42 billion into the economy. This initiative aims to encourage citizens to replace older items, ranging from household appliances and electric vehicles to smartphones, with new ones. This substantial investment comes at a critical time, as China's economy faces slowing growth, a real estate crisis, and declining consumer confidence.

The immediate impact of the policy has been positive. Retail sales in May 2025 surged by 6.4% compared to the previous year, marking the strongest increase in months. This led to a significant rise in customer traffic at electronics stores, shopping malls, and electric vehicle dealerships. Some areas even extended voucher application periods due to overwhelming demand. Notably, the inclusion of smartphone subsidies is seen as a key strategy to boost spending among younger consumers.

However, a pressing concern remains: what happens when these subsidies end? The core issue is that these trade-in programs essentially "borrow future consumption." Consumers who've upgraded their appliances or phones now won't need replacements for several years, potentially creating a future demand slump.

Furthermore, a segment of Chinese consumers remains reluctant to spend, regardless of the stimulus. This "new era of thrift," as economists call it, stems from anxieties about future income and financial stability. Many prioritize saving over discretionary spending. The ongoing real estate crisis is a major factor here; the collapse of the property market, where many Chinese traditionally invested their savings, has led to widespread "negative equity," severely undermining financial security and hindering consumption even with government incentives.

Economic analyses from institutions like Goldman Sachs and Nomura confirm the short-term benefits of these subsidies, but they also predict a potential slowdown or decline in retail growth in the latter half of 2025 if incentives are cut. They worry about the market cooling down after the initial spending frenzy.

In response, the Chinese government is exploring additional stimulus methods beyond direct subsidies, such as cash handouts for families with young children, increased salaries for civil servants, and expanded access to low-interest credit for energy-efficient products. These efforts suggest a strategic shift toward fostering more sustainable consumption channels.

Despite these measures, the long-term effectiveness of these policies remains uncertain, especially with increasing external pressures from the US and other developed economies. If domestic consumption cannot achieve sustained growth, the Chinese economy could fall into a prolonged period of low growth. The worst-case scenario involves consumers returning to saving after the subsidies end, due to a lack of confidence in the economic future. This would negatively impact not only retail but also manufacturing, supply chains, and the labor market, potentially triggering a damaging economic spiral.

In summary, while China's consumer subsidy program is yielding positive short-term results, it carries significant long-term risks. Without accompanying reforms to the social security system and policies to stabilize employment, creating a truly strong and sustainable consumer market will likely remain challenging.