Xi's strategy of choice in the Sino-US trade war - supercharging consumption
Fiscal and monetary policy measures enlisted to boost spending by Chinese households.
China’s top economists anticipate interminable disruptions from Trump’s trade aggression moving ahead, despite GDP growth holding up surprisingly well in the first half of 2025 following the launch of the Liberation Day tariffs.
As a consequence, Beijing is doubling down on policies to boost domestic consumption, making it China’s chief strategy for “resisting the external disturbances” created by Washington’s latest protectionist turn.
At the core of these efforts lie fiscal policies to boost consumption in the form of the “cash-for-clunkers” campaign.
The initiative will see government spending of 300 billion yuan (USD$41.77 billion) in 2025 alone on subsidies for household purchases of durable goods and services.
Beijing is also making recourse to monetary policy to as tool to spur household spending, with the Chinese central bank using structured instruments to channel credit towards consumer loans.
The Ministry of Finance has also taken the unprecedented step of providing subsidies for consumer loans made by the big banks to qualified borrowers.
Consensus opinion amongst China’s leading economists, however, is that these fiscal and monetary policy measures are only stopgap expedients for priming domestic consumption.
Any sustainable increase in consumption as a share of Chinese GDP will require long-haul structural adjustments to income distribution.
This will entail raising the earnings of China’s low-income demographics that possess the greatest consumption potential, alongside improvements to the country’s social safety net.
It may also mean greater state intervention in the stock and property markets, to achieve wealth effects that heighten the sense of affluence amongst Chinese households and whet their inclination to spend.
China’s economy outperforms despite Liberation Day tariffs
China’s top economists remain highly concerned about the uncertainty surrounding Trump’s mercurial tariff policies moving ahead.
This is despite the surprisingly strong performance of China’s economy following the launch of Trump’s Liberation Day levies, and subsequent concessions made by Washington towards Beijing during ensuing rounds of trade negotiations.
China’s real GDP posted growth of 5.3% in the first half, 0.3 percentage points ahead of the print for the same period last year.
This growth rate was also comfortably ahead of Beijing’s full-year growth target of 5%, providing some slack for policymakers to accept slower expansion in the second half.
Foreign trade made an increased contribution to China’s economic growth in the first half of 2025, despite the disruption caused by Trump’s tariff measures.
Net exports of goods and services saw their contribution to Chinese economic growth rise 1.0 percentage points compared to the same period last year. By contrast, end consumption and fixed investment saw their contributions to economic growth recede, by 0.3 and 0.4 percentage points respectively compared to the first half of 2024.
Long-term Sino-US trade decline anticipated
Despite the robust performance of China’s GDP following the initial unveiling of the Liberation Day tariffs, Chinese economists argue that Sino-US trade relations are bound to be adversely affected both this year and over the long-term by Washington’s new-found protectionist mindset.
While Beijing has sought to shore up trade relations with other economies - in particular ASEAN and Belt and Road nations, to pick up the slack, worsening trade with the US is an inevitable headwind for Chinese exports, given the immense size of the American economy.
“This year, it’s almost certain that exports to the US will decline,” writes Guan Tao ( 管涛), head of Bank of China’s investment banking vehicle, in a recent opinion piece on the risk of external disruptions to China’s economy in the second half (”管涛：关注下半年外需扰动风险”).
Official Chinese data indicates that China’s exports to the US fell 10.7% year-on-year in the first half in US dollar terms, while imports from the US fell 9.2%.
During this period, the US share of China’s exports was 11.9%, for a decline of 2.1 percentage points compared to the first half of 2024.
Guan Tao expects the decline in trade between China and the US to further accelerate in the second half of 2025.
He cites tariff analysis from the WTO and IMF indicating that the weighted average tariff applied by the US to the world’s products had risen from 2.4% at the start of the year to 20.1% as of 7 August. Over the same period, the volume of global trade affected by the tariffs surged from US$288.5 billion to US$2.75 trillion.
The US currently applies a 30% levy on Chinese imports, following Trump’s execution of an executive order to place a 90-day pause on further hike until 10 November.
In addition to hitting trade by raising the price of imported goods, Guan argues that Trump’s tariffs will undermine the US as an export market, by enervating the American economy and weakening its domestic demand.
Yale’s Budget Lab estimates that Trump’s tariffs will shave 0.5 percentage points off US GDP growth in 2025, and that by the end of the year US unemployment rates will rise by 0.3 percentage points.
Domestic consumption now China’s core mission
Beijing views fostering China’s domestic demand - primarily in the form of household consumption - as one of its primary strategies for dealing with the disruptions caused by an interminable trade dispute with America.
“Unleashing domestic demand potential is the key to resisting external disruptions,” Guan Tao writes.
“Even if the latest reciprocal tariffs from the US don’t involve China, they will still have an indirect impact on us.
“In the second half, we must make haste to assemble a comprehensive plan for expanding domestic demand, and use the certainty of expansion in domestic demand to deal with the challenge of uncertainties in the external environment.”
“Expanding domestic demand is still the primary work mission for the second half of the year,” wrote Wen Bin (温彬), chief economist at China Minsheng Bank, in an opinion piece concerning the Politburo’s meeting at the end of July (”温彬：“持续发力”用好存量政策 保留“适时加力”空间”).
“The [Politburo] meeting firstly made reference to the need to effectively unleash domestic demand potential.
“Looking at matters overall, the focus of economic work will be on services consumption, improvements to living standards, measures to curb involuted competition and the prevention of risk.”
Liu Yuanchun (刘元春), chancellor of Shanghai University of Finance and Economics, argues that China has made support for consumption a strategic priority in 2025 in the wake of Trump’s tariff aggression.
“Expanding consumption is China’s national strategy,” Liu said in an interview with Xinwen 1+1 on China’s second-half economic policies. (”刘元春：中央政治局会议——下半年经济怎么干?”).
He points to the release of a raft of consumption policies in the first half of 2025, including the “Special Action Plan on Spurring Consumption” (提振消费专项行动方案) which was released in March, and will “continue to be implemented at multiple levels in the second half.”
Liu expects growth in consumption to be the enduring theme for China’s economic policymakers across the remainder of the decade.
“Improvements to living standards and expanding consumption are an extremely critical matter, and will be key themes in the 15th Five Year Plan (2026 - 2030),” Liu said.
Weak consumption is China’s long-term challenge
Liu Shijin (刘世锦), the former head of the State Council’s Research Centre and the deputy-chair of the 13th National Committee of the Chinese People's Political Consultative Conference (CPPCC), points to weak consumption as a long-term challenge for China’s economy well before Trump’s ramping up of the trade conflict with Beijing.
“In recent years, China’s economic growth since the pandemic has faced the severe challenge of inadequate demand,” Liu Shijin said in a speech delivered on 16 August at the 2025 Asset Management Summit Held in Shanghai (”刘世锦：要减少消费不足的结构性偏差，形成稳增长促转型的新动能”).
“Inadequate demand isn’t a case of inadequate investment - it’s primarily inadequate consumption.
“Whether compared to other countries or stages of development, China’s consumption rates are at relatively low levels.”
China launched concerted efforts to boost domestic consumption during the Covid pandemic.
At the end of 2022, the Communist Party’s Central Committee and the State Council jointly issued the “Planning Framework for the Strategy to Expand Domestic Demand (2022 - 2035)” (扩大内需战略规划纲要（2022~2035年）).
The Framework outlined a total of ten key missions for driving domestic demand, including “comprehensively upgrading consumption.”
Beijing sought to boost consumption through its cash-for-clunkers (旧换新) campaign throughout 2024, providing subsidies for purchases of durable goods that included EVs and household appliances.
Funding support for the campaign stepped up in the second half of 2024, with its success prompting Beijing to further expand the scope of the policy in 2025.
Donald Trump’s election win at the end of 2024 also prompted Beijing to reiterate its focus on consumption growth in 2025, in anticipation of hostile trade measures from Washington.
The Central Economic Work Conference held by the Chinese central government in December made “vigorously boosting consumption, raising the efficiency of investment, and comprehensively expanding domestic demand” the top economic policy goals for 2025.
Cash-for-clunkers the core short-term measure
At the centre of China’s current measures to boost consumption lies its “cash-for-clunkers” program to subsidise household spending on goods and services.
Liu Yuanchun notes that Beijing has allocated 300 billion yuan (USD$41.77 billion) to the cash-for-clunkers program in 2025. The first half saw over half of this amount used for the program, with around 130 billion yuan still left in the second half.
Liu expects cash-for-clunkers to further expand moving forward, with policymakers deeming it an effective short-term means of supporting domestic consumer demand.
“We have seen the effectiveness and intensity of policy-driven consumption growth, and in the second half China will maintain the comparatively strong conditions of the first half,” he said.
“Firstly, there will be a shift from traditional durable goods to new and emerging consumer goods, and from physical commercial goods to certain commercial services.
“This is an inevitable outcome...if we just focus on durable goods, then we will definitely face diminishing marginal efficiencies.”
Equitable wealth distribution the long-term goal
Despite their short-run effectiveness thus far, Liu Yuanchun points out that consumer subsidies are only part of the solution to boosting Chinese household spending.
“We cannot possibly rely solely on continuous consumer subsidies to achieve stable medium-term consumption,” he said.
Liu argues that long-haul adjustments to wealth distribution and greater growth in the earnings of low-income demographics are the keys to China achieving a sustainable rise in consumption.
“We must instead use multiple adjustments including systemic mechanisms and fundamental adjustments to produce a stable expansion in consumption and an upgrade in consumption ratios,” he said.
“For this reason, protecting household incomes, protecting household balance sheets, protecting social welfare systems and improving living standards are key entry points for expanding consumption.”
Liu Shijin also considers a more equitable distribution of wealth in China and stronger social welfare protections to be essential to long-term consumption growth, with consumer subsidies only serving as a stop-gap solution until positive structural reforms take place.
“We need to increase the earnings of low-income groups and raise the level of public services,” he said.
“An effective strategy for expanding consumption will focus on advancing structural reforms, with the goal of enabling low-income groups with the largest consumption potential to markedly increase their consumption capability.
“The focus here will be on education, healthcare, social housing, social welfare and aged care.”
Beijing’s “Special Action Plan on Spurring Consumption” released in March calls for “spurring rational growth in salary-based income,” alongside “improvements to mechanisms for adjusting minimum salaries and scientific and rational increases in minimum salary levels.”
The central government’s current focus on stabilising China’s stock and property markets also reflects concern over the impact of wealth distribution upon domestic consumption.
Beijing has explicitly made the wealth effects arising from a healthy stock market and rising property prices a key component of its broader policies to spur household spending.
In addition to raising salaries, the Special Action Plan on Spurring Consumption calls for “expanding channels of asset-based income,” and adopting “multiple measures to stabilise the stock market.”
To this end, it calls for unlocking greater medium and long-term investment in stock market by China’s institutional investors, including commercial insurers, pension funds and enterprise annuity funds.
Targeted monetary policy enlisted to support consumption
A final tool for boosting domestic consumption lies in China’s distinct brand of monetary policy, and its ability to use “structured instruments” to channel credit to high-priority parts of the economy
This was demonstrated by the Chinese central bank’s last major raft of monetary policy measures which were announced on 7 May, little more than a month after Liberation Day.
Central bank governor Pan Gongsheng (潘功胜) outlined a total of 10 monetary policy measures to deal with the impacts of Trump’s shock tariffs.
The headline measures were a 0.5 percentage point cut to the required reserve ratio, which was expected to unleash 1 trillion yuan in medium and long-term liquidity, and a 0.1 percentage point cut to the central bank’s short-term policy rate, from 1.5% to 1.4%.
In addition to these orthodox monetary policy adjustments, Pan also announced other measures involving the use of “structured monetary policy tools” to channel lending to priority areas.
This included the establishment of a 500 billion yuan (USD$69.63 billion) re-loan facility to support lending for services consumption and aged care.
More recently, Beijing has made the unprecedented move of providing fiscal subsidies to consumer loans by China’s leading banks.
This was heralded at the end of June by the release of the “Guidance Opinions on Financial Support for Boosting and Expanding Consumption” (关于金融支持提振和扩大消费的指导意见) by six central government authorities, including the central bank and the National Development and Reform Commission (NDRC).
The Guidance Opinions were followed by the release of the “Personal Consumer Loan Fiscal Subsidy Policy Implementation Plan” (个人消费贷款财政贴息政策实施方案) by the Ministry of Finance and the Chinese central bank on 12 August.
“The goal here is to implement the central government’s policy arrangements to spur consumption and expand domestic demand, using fiscal subsidies to guide reductions in the costs of household consumer loans, thus unleashing consumption potential,” wrote Fu Yifu (付一夫), senior researcher at the Xingtu Financial Research Institute in a recent analysis (”付一夫：新政对消费金融公司提出了4点新要求”).
The Subsidy Policy Implementation Plan is noteworthy for making five consumer finance companies eligible for the subsidies, alongside the big six state-owned banks and 12 national joint-stock commercial banks.
This means that consumer finance companies are now formally included within the remit of Beijing’s campaign to boost consumption, enjoying the sanction of top policymakers as a specialised part of China’s broader credit ecosystem.
Beijing focused on services consumption
A key shift in Beijing’s efforts to boost consumption since the start of the second half of 2025 is a heightened focus on domestic consumption of services.
Liu Shijin argues that at the root of China’s weak levels of consumption lie low levels of services consumption - particularly amongst the country’s still vast population of poorer rural citizens.
“Inadequate consumption is mainly embodied by inadequate services consumption,” he said.
“The largest shortfall in inadequate consumption lies in rural households, in particular the nearly 300 million rural workers and nearly 200 million rural migrants to the cities.”
Wen Bin says that policymakers are currently adjusting policies to specifically address these lagging areas of household spending.
“The focus on spurring consumption will gradually shift towards services consumption, alongside improvements to living standards,” Wen Bin writes.
“The recent release of policies on personal consumer loan subsidies, subsidies for rearing children, and exemptions from kindergarten childcare and education fees in the year prior to schooling are all related to this.”