Retail spending in China just got a shot of adrenaline. Thanks to Beijing's trade-in subsidy program, consumers rushed to replace old electronics and home appliances, driving May's retail sales growth to the highest level in more than a year. Some categories clocked in with over 50% year-over-year growth. The stimulus is being fueled by a 300 billion yuan ($41.8 billion) special sovereign bond package—twice last year's level—aimed at boosting confidence and countering the drag from U.S. tariffs. But local governments are already feeling the strain. Provinces like Henan and Chongqing have run through their allocated budgets, forcing a pause on new applications. Others, including Jiangsu and Guangdong, are throttling access through daily caps.
That's raised concerns not just about execution, but sustainability. Just over half of the funds have been distributed or are being processed, but nearly two months after the second tranche was announced, disbursement delays persist. Beijing's fiscal leeway is shrinking as tax revenues fall and debt service costs rise. This year's budget deficit has been pushed to the highest level in over three decades, while bond issuance is up 80% from 2024. Economists warn that while the current consumption boost looks impressive, it may be hard to repeat unless China addresses deeper issues—like household income stagnation and private sector confidence. Some local retailers have even been flagged for possible price inflation to exploit the subsidy scheme, adding more complexity to an already fragile rollout.
Still, Beijing isn't giving up on demand-side tools just yet. Beyond consumer subsidies, officials are turning to business-facing policies—like urging electric vehicle makers such as Tesla (TSLA, Financial) to speed up supplier payments, and clearing overdue bills to private firms. These moves won't generate headlines overnight, but they could lay the groundwork for more stable growth in the medium term. In the meantime, analysts expect additional subsidy funding to be pushed through to avoid a sentiment dip. But the bigger question remains: how long can China keep the consumer engine running without reworking the whole system?
