The Chinese economy has once again hit its mark. In mid-January, the National Bureau of Statistics announced that the economy expanded by 5 percent in 2025, meeting Beijing’s official growth target and capping off the 14th Five-Year Plan with apparent success.
Yet beneath this numerical achievement lies an uncomfortable truth that global investors and policymakers should understand: China’s growth has become increasingly expensive to maintain, and its dividends are reaching ordinary households with diminishing force.
The divergence between headline growth and household reality is now impossible to ignore. While GDP expanded by 5 percent in 2025, median per capita disposable income – a more representative measure of what typical families actually earn – rose by only 4.4 percent, slowing from the 5.1 percent gain in the previous year. Urban residents fared even worse, with median income growth of just 3.7 percent – worse than the 4.6 percent growth in 2024. The slowdown may seem modest in percentage terms, but it signals something profound: the transmission mechanism that once converted aggregate growth into broadly shared prosperity is weakening.
This overall pattern might be understood as “frictional growth”: a state in which the economic engine still generates increasing heat but delivers diminishing propulsion. That’s not to say that China’s economy is collapsing. Rather, it is a recognition that growth itself has become a form of maintenance rather than expansion.
The corporate sector has become the primary bottleneck in this transmission failure. In 2025, industrial profits edged up 0.6 percent – the first annual increase since 2021 – a positive development that nonetheless exposes how anemic the post-COVID recovery of corporate China has been. Meanwhile, producer prices contracted for 39 consecutive months through December 2025, with the index falling 2.6 percent for the full year.
Firms facing this relentless price deflation were forced to respond rationally: preserving cash, deleveraging balance sheets, and minimizing risk rather than expanding payrolls or raising wages.
This defensive posture transforms enterprises from conduits of wealth distribution into nodes of wealth retention. When companies prioritize survival over expansion, the gains recorded in national accounts fail to cascade down to workers and consumers. As a result, while the macroeconomic statistics continue to register growing activity, the microeconomic reality for households has stagnated.
The household response has been equally rational – and equally concerning for policymakers hoping to stimulate consumption. Retail sales growth decelerated sharply throughout 2025, falling to just 0.9 percent year-on-year in December, the weakest since December 2022. Meanwhile, household deposits surged nearly 10 percent in 2025. The central bank’s quarterly survey found that 62.3 percent of urban residents preferred saving over spending or investing in the third quarter of 2025, up from 58 percent in early 2023.
To be fair, Chinese consumers have not frozen entirely. Services spending has shown resilience, with cultural, sports, and recreational services registering double-digit growth. But households have clearly redrawn their safety boundaries, cutting back on big-ticket purchases like automobiles and property-related goods.
China’s leadership is clearly aware of these structural tensions. The December 2025 Central Economic Work Conference explicitly prioritized boosting domestic demand and household income, with officials calling for implementation of “urban-rural income growth plans” and expansion of social safety nets. The Finance Ministry’s recent proclamation to ensure fiscal spending “only increases” in 2026 signals a continued willingness to deploy substantial resources. And repeated references to combating “involution” in industrial policy suggest recognition that cutthroat price competition among firms is destroying value rather than creating it.
Yet policy acknowledgment and policy effectiveness are different matters. The structural factors suppressing consumption – household wealth losses from property depreciation, inadequate social insurance coverage, labor market softness – require sustained, multi-year efforts to address. Temporary subsidies for consumer good trade-ins have produced visible but fleeting results; headline retail sales growth dropped sharply once the base effects from earlier stimulus faded. More fundamentally, the precautionary savings impulse will not reverse until households perceive durable improvements in income security and asset values.
The critical question for 2026 and beyond is whether Beijing can restructure the growth model before the current pattern exhausts itself. The risk is not that GDP growth will suddenly crater – authorities still possess extensive policy tools to maintain headline figures. The deeper risk is that growth increasingly becomes a cost to be borne rather than a benefit to be shared. When prosperity must be purchased through ever-larger fiscal deficits and ever-longer producer price deflation, it ceases to function as prosperity at all.
For external observers, the key metric is no longer whether China achieves 5 percent growth again in 2026, but whether that growth restores the income transmission channels on which sustainable demand ultimately depends.
