China consumer rush for subsidies overloads stimulus program

“The rapid use of the subsidies suggests the program is effective in expanding sales of the products it targets,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered.

“However, considering limitations to the country’s fiscal capabilities, we still need sustainable measures to carry on the traction in the long-run after sentiment is boosted by the subsidies in the short term,” Ding said.

The program has been key to encouraging household purchases of a slew of consumer goods this year. In May alone, home appliances and electronics saw growth in excess of 50%.

The trade-in program “should remain supportive for some durable goods sales,” according to economists at Goldman Sachs Group Inc., who also warned in a note that “its boost may be disrupted in June due to funding shortages in some regions.”

The authorities have said they will distribute a total of 162 billion yuan in two tranches to provinces, with the second allocation announced in late April. Some seven weeks later, the central bank-backed Financial News reported that money is still in the process of being made available to provinces.

While the government may soon roll out the remaining funds planned for this year, economists cautioned that Beijing needs to come up with more sustainable measures to put consumption on track to recovery for the long haul.

Another approach Beijing is taking is relying more on policies aimed at lifting business confidence to encourage private investment and hiring, a shift likely to translate into stronger consumption if sustained over time. Such steps include meeting government arrears to companies and the recent appeal to major electric vehicle makers to make timely bill payments.

Unlike the consumer subsidies, such measures offer no quick payoff but could help consumption in the longer term, according to Ding. For now, he expects speedy follow-up subsidy allocations by the national government to “maintain confidence” since Beijing is front-loading fiscal incentives this year.

Concern over reliance on subsidies is also spreading to official circles. A newspaper backed by the State Council, China’s cabinet, has said the government “must improve the income distribution system and try all means to increase income” for residents.

“Boosting consumption cannot just rely on policy stimulus,” according to a front-page editorial carried earlier this month in The Economic Daily.

Mounting fiscal stress is another reason why Beijing’s options are narrowing. With tax and land sales revenues in decline, Chinese authorities accelerated borrowing in recent years to fund stimulus measures to support the economy.

Beijing raised its official fiscal deficit — mostly shouldered by the central government — to the highest level in more than three decades this year, and increased the amount of special sovereign bond issuance to 1.8 trillion yuan, 80% more than in 2024. As a result, China’s interest bill is increasing quickly, in turn eroding the government’s spending power.

But as Donald Trump’s tariffs hurt overseas demand and put China’s industrial production under pressure, it’s unlikely that Beijing will change course on its flagship policy of consumer subsidies any time soon, despite recent hiccups.

Some regions may have had to announce a partial suspension of the program after running out of trade-in funds because of promotions offered during the “618” shopping festival, Morgan Stanley economists including Robin Xing wrote in a note.

Local authorities may also be attempting to smooth the pace of subsidy rollout and prevent “arbitrage,” they added, in response to efforts by some retailers to benefit from the consumer subsidies by inflating prices.

“These glitches in the consumer goods trade-in program may be fine-tuned or remedied, but they may also reflect inherent limitations of such stimulus,” the Morgan Stanley economists said. “Given continued external uncertainty and deflationary pressures, we see a very low risk of the consumer trade-in program being suspended altogether.”