Chinese Premier Li Qiang’s bold talk of building a “mega-sized consumer powerhouse” has a serious economic gravity problem.

Although Li has only been on the job since March 2023, his boss, Xi Jinping, took the reins of power a decade earlier. Back in 2013, as Xi pledged to let market forces play a “decisive role” in China’s economy, a key policy priority was pivoting from exports and investment to a more domestic demand-led growth model.

Recent data serve as a reminder of how much this aspiration remains, at best, a work in progress. Chronically weak consumer confidence and spending is pushing China further and further down the road to deflation.

Although the 0.1% drop in consumer prices in May was mild, marking the fourth straight month of declines despite various stimulus moves, producer prices fell 3.3% year on year. And price cuts in key sectors like autos may hasten the downward trend.

A decade-plus of foot-dragging on recalibrating growth engines is catching up with China. Donald Trump’s trade war is generating ever bigger headwinds, while potential war in the Middle East and the resulting risk-off shift in markets is complicating the global economic outlook.

At People’s Bank of China headquarters, too. There, Governor Pan Gongsheng faces an unpalatable set of options. He could ease monetary policy to curb deflation and boost household and business confidence, or avoid rate cuts to keep the yuan exchange rate from falling.

A weaker currency is a multi-edged sword. On the one hand, it would increase default risks among giant property developers as it becomes more expensive to make payments on overseas debt. On the other, it would set back Xi’s years-long effort to reduce leverage in the financial system.

Xi’s yuan internationalization push also might take a hit. One of Xi’s top reform prizes has been securing the yuan’s inclusion in the International Monetary Fund’s “special drawing rights” basket, alongside with the dollar, euro, yen and pound.

Last week, Pan told a business forum that Beijing remains determined “to weaken excessive reliance on a single sovereign currency.” There, he detailed China’s strategy to create a financial infrastructure to hasten the currency’s global use and, including by increasing incentives for the trading of yuan foreign exchange futures.

Of course, China needs to step up capital markets reforms and create a globally trusted regulatory system. “China’s rule of law is inferior to the US, it does not offer a large and deep pool of liquid assets that is open to foreign investors like the US,” says strategist Matt Gertken at BCA Research.

Yet Li’s plan to morph China “into a mega-sized consumer powerhouse on top of its solid foundation as a manufacturing power” should be the most important priority of the Xi era. As Li puts it, “this will bring vast markets to enterprises from all countries.”

On one level, Li talked of China’s desire to be viewed as the protector of globalization as Trump goes tariff wild. “Economic globalization will not be reversed; it will only carve out a new path,” Li said. “We will further integrate and connect with the global market.”

He added that “we will not and shall not return to closed-off and isolated islands.” Li also said China is well-positioned to “move forward steadily, and continue to inject more stability and certainty into the world economy.”

Though Li was careful not to mention Trump, the US leader was written between the lines in bold font. Li urged “all parties to avoid the politicization of economic and trade issues.”

Vice Premier He Lifeng amplified Beijing’s desire to “actively expand domestic demand to boost consumption,” as reported by the official Xinhua News Agency.

Li, meanwhile, played up China’s advances in areas such as electric vehicles and artificial intelligence. He said China would “share indigenous technologies and innovative scenarios with countries around the world.” 

Clearly, Li is referring to Washington’s efforts to deprive China of advanced semiconductors and other high-tech equipment on national security grounds. Yet, as recent data reminds, China’s real battle is with domestic consumers who save more than they spend.

There’s not a moment to waste. For years, economists from East to West knew that China needed to prod consumers to save less and spend more. Unless Xi can truly pivot to a consumption-driven model, it will delay the moment when China surpasses the US in gross domestic product (GDP) terms. Or, even miss its chance to be the world’s No 1 economy.

Chinese households are serious savers. That’s becoming a headwind all its own at a moment when Beijing is less willing to stimulate GDP, local governments are focused on reducing debt and deleveraging, and China’s export machine is facing a rocky global economy and rising protectionist walls to its products.

The PBOC’s latest consumer survey, covering the October-December 2024 period, reports that 61.4% of Chinese mainlanders would rather save money than spend or invest it. This reading has been above 60% since late 2023.

For years now, the International Monetary Fund has been among those urging China to get serious about increasing the role of consumer spending.

As IMF economist Diego Cerdeiro puts it, “an ambitious but feasible set of reforms can improve these prospects, importantly in a way that is inclusive by raising the role of household consumption in demand. Reforms such as gradually lifting the retirement age to increase labor supply, strengthening unemployment and health insurance benefits, and reforming state-owned enterprises to close their productivity gap with private firms would significantly boost growth in coming years.”

It’s not just China, of course. Brad Setser at the Council on Foreign Relations points out that “the combined savings of China, Japan, Korea, Taiwan and the two city-states of Hong Kong and Singapore is about 40% of their collective GDP, a 35-year high. No other region of the world currently contributes more to the global glut in savings that has brought interest rates around the world down to record lows.”

Setser adds that Asia’s current account surplus – its excess of savings over investment – has increased significantly in the past two years and is now about as large, relative to the GDP of its trading partners, as it was prior to the global financial crisis of 2008. “Without a policy push to bring down savings,” he says, “East Asia’s excess savings will continue to give rise to new economic and financial risks, both inside the region and globally.”

Generally speaking, China’s 1.4 billion people sock away about one-third of income. That’s roughly three times the average of American consumers. Deploying that cash is the key to China becoming a domestic demand-led powerhouse.

Consumption is the key to allowing Beijing to throttle back on fiscal policy and local governments to rely less on leverage. And it’s central to phasing out the gigantic shadow banking system and letting the PBOC withdraw massive stimulus from the economy.

The need for a recalibration from over-investment to consumption was well-known even before Xi rose to power over a decade ago. So is the need to create broader safety nets across sectors. But time and time again, the hard work of engineering it took a backseat to short-term considerations.

Building a bigger network of stable and trusted safety nets would pay the biggest dividends. As Boston University economist Laurence Kotlikoff posits, the key is crafting a “modern version of Social Security” that’s “fully-funded, transparent, efficient, fair and progressive” and “features personal accounts that are collectively invested by the government at zero cost to workers.”

Philosophically, such a system needs “to be fundamentally reformed without undermining its legitimate mission — forcing people to save and insure and providing forms of social insurance that the private market would either not provide or provide poorly.” The point, too, he says is to build a social safety net that is not “incomprehensible, inefficient, inequitable, and, most important, insolvent.”

Easier said than done, of course. In general, say IMF economists, the “prioritization of spending on households over investment would also deliver larger stabilization benefits. For example, means-tested transfers to households would boost aggregate demand 50% more than an equivalent amount of public investment. To ensure consistency across policies, fiscal policy should be undertaken within a medium-term fiscal framework.”

Trouble is, the world’s second-largest economy is still struggling with weak consumer sentiment and deflation. Whatever life there is in consumer activity, it tends to be driven by government-subsidized home goods trade-in programs, not organic economic optimism.

Clearly, China has a “mega-sized” opportunity to reorder the global economy –  especially as Trump walls off the US economy in the name of making America great again. It just needs to act on increasing the role of domestic consumption, and not just talk about it.

Follow William Pesek on X at @WilliamPesek