Finance
Why aren’t Chinese consumers spending enough
Customers look at clothes advertising discounts of 80% or 70% in a supermarket in Hangzhou, Zhejiang province, China, on June 9, 2025.
Cfoto | Future Publishing | Getty Images
BEIJING — China’s consumer spending shows little sign of picking up soon, given uncertainty about future wealth, changing preferences and lack of a social safety net.
It’s been four straight months of declining consumer prices, consumer confidence is hovering near historic lows, and the real estate market is struggling to turn around. Analysts repeatedly point to one main factor: stagnant income.
Disposable income in China has halved its pace of growth since the pandemic hit in 2020, now growing only by an average of 5% a year, Jeremy Stevens, Beijing-based Asia economist at Standard Bank, said in a report Wednesday.
Most jobs aren’t giving much of a raise. Out of 16 sectors, only three — mining, utilities and information technology services — have seen wage growth exceed that of gross domestic product since 2020, he said.
Monthly business surveys for May showed contraction in the labor market across the board, especially as factories navigate U.S. tariffs. The unemployment rate among young people aged 16 to 24 and not in school remained high in April at 15.8%. The official jobless rate in cities has hovered around 5%.
A record high of 64% Chinese households said in the third quarter of 2024 that they would rather save money rather than spend or invest it, according to a quarterly survey by the People’s Bank of China.
While that moderated to 61.4% in the fourth quarter, according to the latest survey released in March, it reflected a trend of more than 60% of respondents preferring to save that’s been recorded since late 2023.
And for the respondents who planned to increase spending, education was the top category, followed by health care and tourism, according to the PBOC’s fourth-quarter survey released in March.
More than half of respondents viewed the job market as becoming more difficult or hard to tell.
People in China have been culturally inclined to save, especially since limited insurance coverage means individuals must often bear most of the cost of a hospital treatment, higher education and retirement. The real estate slump of the last few years has also weighed on spending since property accounts for most of household wealth in China.
One way to make people more willing to spend is to more than double pension payouts, by increasing the share of state assets paid to the Ministry of Finance, Luo Zhiheng, chief economist at Yuekai Securities, said in a note.
He added that increasing public holidays and offering services sector consumption vouchers could also help.
In the last few weeks, Chinese authorities have stepped up plans to further support employment and improve social welfare. But policymakers have avoided the mass cash handouts that the U.S. and Hong Kong gave residents to stimulate spending after the pandemic.
Coming out of the pandemic, analysts cautioned that retail sales in China would recover very slowly as major uncertainties for consumers remained unresolved.
In the decade before the pandemic, “Chinese consumers were willing and able to buy any innovation, even innovations that were not that really innovations,” said Bruno Lannes, Shanghai-based senior partner with Bain & Company’s consumer products and retail practices.
“In today’s world they are more rational. They know what they want,” he said on a webinar Thursday.
China is scheduled to report retail sales for May on Monday. Analysts polled by Reuters predict a slowdown to 4.9% year-on-year growth, down from 5.1% in April.
A shift out of big cities
Another factor behind negative CPI reads is that Chinese consumers are turning to lower-priced products, either partly benefiting from the overproduction of relatively high-quality goods, or moving away from big cities to places where the cost of living is lower.
Shanghai lost 72,000 permanent residents last year, while Beijing saw a 26,000 drop, Worldpanel and Bain & Company pointed out in a report Thursday. The two cities are typically categorized as “tier 1” cities in China.
As a result of the population shift, smaller cities categorized as “tier 3” and “tier 4” experienced far higher growth in the volume and value of daily necessities sold last year — helping offset a decline in the tier 1 cities, the report said. The study covered packaged food, beverages, personal care and home care.
It found that while the overall volume of such goods sold in China rose by 4.4% last year, average selling prices fell by 3.4%, as consumers preferred lower-priced products and businesses increased promotions.
The trend is even influencing flower sales.
The Kunming International Flora Auction Trading Center in Yunnan province, Asia’s largest flower market, said in May that more demand is coming from less affluent lower-tier cities, resulting in higher volumes but lower average selling prices.
Business has quieted down after the busy May holiday season, Li Shenghuan, a flower seller near the trading center, said Friday. She said flower prices have come down slightly, partly because more people have been growing flowers. She expects demand to pick up around the National Day holiday in early October.
For a sense of the disparity, rural per capita disposable income has been less than half that of cities for years, according to official data. Per capita disposable income in urban areas last year was 54,188 yuan ($7,553). That’s far less than the $64,474 reported for the U.S. as of December.
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Standard Bank’s Stevens pointed out that the ratio of consumption to income in rural areas has “substantially increased” and surpassed pre-pandemic levels, while that of urban households has declined. But he noted that lower-income households don’t have the scale of wealth that higher-income groups do in order to meaningfully increase consumption in the near term.
The top 20% accounts for half of total income and consumption in China, and 60% of total savings, he said. “Policy support for low-income groups, while well-meaning, is insufficient without structural wage reform.”
In addition, China’s “common prosperity” rhetoric “has introduced institutional realignments and policy shifts that, while well-intentioned, have added to the uncertainty,” Stevens said, noting the changes have “yet to fully find a new equilibrium.”
Cybersecurity and enterprise software stocks have been market dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader market rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.
Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, said on this week’s “ETF Edge.”
It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.
A big driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon said, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.
But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, said last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he said on CNBC’s “Money Movers” on Wednesday.
“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the market for their bank debt,” he wrote.
The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.
Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.
Performance of Global X cybersecurity ETF versus S&P 500 over past one-year period.
Magoon said expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.
“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon said.
He said AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing new competition. But he added, “I think the dip is good to buy in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.
For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill said.
But Magoon advises investors to at least take the reminder to keep an eye on niches in the market during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he said.
While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.
Meanwhile, this year’s biggest winner is also a good example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon said, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said.
But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the market yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is bad right now, it could get a lot worse,” Magoon said. But he added that there’s a silver-lining in that data, too, for the patient investor. The market has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon said, “stick in there.”
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New innovation in the exchange-traded fund industry could come at a cost to investors during extreme conditions.
According to MFS Investment Management’s Jamie Harrison, ETFs involved in increasingly complex derivatives and less transparent markets may be in uncharted territory when it comes to violent downturns.
“Those would be something that you’d want to keep an eye on as volatility ramps up,” the firm’s head of ETF capital markets told CNBC’s “ETF Edge” this week. “As innovation continues to increase at a rapid pace within the ETF wrapper, [it’s] definitely something that we advise our clients to be really front-footed about… Lack of transparency could absolutely be an issue if we’re going to start seeing some deep sell-offs.”
His firm has been around since 1924 and is known for inventing the open-end mutual fund. Last year, ETF.com named MFS Investment Management as the best new ETF issuer.
“It’s important to do due diligence on the portfolio,” he said. “Having a firm that has deep partnerships, deep bench of subject matter experts that plays with the A-team in terms of the Street and liquidity providers available [are] super important.”
Liquidity as the real issue?
Harrison suggested the real issue is liquidity, particularly during a steep sell-off.
“We’ve all seen the news and the headlines around potential private credit ETFs. That picture becomes much more murky,” he added. “It’s up to advisors, to investors [and] to clients to really dig in and look under the hood and engage with their issuers.”
He noted investors will have to ask some tough questions.
“What does this look like in a 20% drawdown? How does this liquidity facility work? Am I going to be able to get in? Am I going to be able to get out? And if I’m able to get out, am I able to get out at a price that’s tight to NAV [net asset value], and what’s the infrastructure at your shop in terms of managing that consideration for me,” said Harrison.
Amplify ETFs’ Christian Magoon is also concerned about these newer ETF strategies could weather a monster drawdown. He listed private credit as a red flag.
“If your ETF owns private credit, I think it’s worth taking a look at, kind of what the standards are around liquidity and how that ETF is trading, because that should be a bit of a mismatch between the trading pace of ETFs and the underlying asset,” the firm’s CEO said in the same interview.
Magoon also highlighted potential issues surrounding equity-linked notes. The notes provide fixed income security while offering potentially higher returns linked to stocks or equity indexes.
“Those could potentially be in stress due to redemptions and the underlying credit risk. That’s another kind of unique derivative,” Magoon said. “I would very closely look at any ETF that has equity-linked notes should we get into a major drawdown or there be a contagion in private credit or something related to the banking system.”
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