China's consumer-led growth model has failed: Former Morgan Stanley Economist
New Delhi, June 29
China's retail sales fell 0.6 per cent year‑on‑year in May 2026 after a weak April, marking the first monthly decline in three and a half years, Stephen Roach, former Chief Economist and Asia Chair, Morgan Stanley, wrote on his Substack account, arguing that the country's prolonged effort to steer toward consumer‑led growth has failed.
Roach said that the failed growth model led to Chinese state, state‑owned enterprises and private firms capturing a disproportionate share of national income, leaving ordinary households deprived.
Further, weak consumption will force China to rely more heavily on exports and investment to meet growth targets, a shift that could expand China's share of global manufacturing to 45 per cent by 2030.
Such an outcome would force the rest of the world, especially Europe to pursue anti-China protectionism, he argued.
The household consumption share of nominal GDP of about 39.9 per cent in 2024 is nearly identical to 39.8 per cent level seen in 2005, which the former Premier Wen Jiabao had highlighted as the major problem of the Chinese model.
"Given the protracted weakness in Chinese consumption in 2025 and early 2026, there is good reason to believe that the current ratio of household consumption to GDP has fallen below the Wen 2005 benchmark," the post read.
A shift from export-led growth to a consumer-led impetus was warranted long back, along with policy changes to redirect excess saving to saving absorption that would lower the current account surplus and fund a larger social safety net.
A failure to actualise this outcome will lead the Chinese economy to "a protracted property crisis, a low household income share of GDP, post-Covid scarring effects, demographic shifts, and high youth unemployment."
"Some dismiss China's failed consumer-led rebalancing as a statistical mirage, especially since it purportedly excludes government support for education, healthcare, cultural amenities, and subsidised food," the report added.
— IANS
Reader Comments
This is exactly what happens when you suppress wages and ignore household income. Household consumption share hasn't changed in 20 years! Meanwhile, their exports keep growing. And now they'll flood global markets, hurting countries like India too.
Roach makes a solid point about the social safety net. Chinese households save excessively because they have to fund their own healthcare and education. That's the real problem—they can't spend when they're scared. India's got similar issues with inadequate social protection.
Good analysis but I'm skeptical. The Chinese economy is still huge and they'll find a way. Their manufacturing might reach 45% of global share—that's scary for Indian 'Make in India' dreams. We need to ramp up our own competitiveness, not expect their slowdown to benefit us.
As an outsider watching this, it's interesting. Chinese leaders always talked about rebalancing toward consumption but never really did it. The property crisis is just a symptom of deeper structural issues. India should be careful not to make the same mistakes with its own real estate sector.
The article says household consumption share is still at 2005 levels—that's shocking! Two decades of growth and ordinary Chinese haven't benefited proportionally. India's consumption share is much higher (~55-60%) but we have our own issues with inequality. Both countries need workers to get a fair share.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.