Weak goods consumption drags on China retail, while services consumption remains relatively stable

Overview

This report reassesses the reasons behind the sharp slowdown in China retail sales since 2026. Nomura argues that the main drag comes from goods consumption, especially the payback effect in subsidized durable goods after the trade-in policy stimulus over the past two years; in contrast, broader services consumption growth, including non-catering services, has remained relatively stable. The report also points out that the real estate downturn, diverging wealth effects from AI and stock market gains, and household balance sheet repair through austerity rather than income growth will all constrain consumption recovery.

Core views

The core judgments include: first, the retail sales slowdown does not reflect a broad-based collapse in consumption, but rather significant pressure on goods, especially subsidized durable goods; second, the marginal stimulative effect of the trade-in policy on goods consumption has clearly faded, with autos, home appliances, and furniture showing obvious payback effects; third, services consumption accounts for a relatively high share of broad retail and its growth is stable, but because services are non-standardized and prices are more volatile, subsidies alone are less effective in driving demand; fourth, cleaning up bad real estate debt and reforming the basic pension system are more likely to improve consumption and income distribution than continued reliance on short-term subsidies.

Analysis framework

Using category data on above-quota goods retail sales published by the National Bureau of Statistics, the report decomposes the contribution of subsidized and non-subsidized goods to changes in goods retail sales growth; at the same time, using the newly released NBS measure of total retail sales of goods and services, it estimates the shares and growth rates of goods, catering, and non-catering services to identify the true sources of consumption weakness. The report also combines CF40 research on household balance sheet repair to discuss the K-shaped wealth effect from real estate and stock markets.

Methodology notes

• Macro Consumption AnalysisDecomposition of Subsidized and Non-subsidized Goods

  Payback effect after trade-in subsidies

  The report includes autos, home appliances, communication equipment, office supplies, furniture, and sports and entertainment goods as subsidized durable goods, compares growth rates in 2025 versus January-May 2026, and estimates their contribution to the slowdown in above-quota goods retail sales using category sales shares.

• Aggregate Measure AdjustmentBreakdown of Goods, Catering, and Non-catering Services

  Broad Retail Sales

  Traditional total retail sales of consumer goods do not include services consumption outside catering. Based on the newly released NBS measure of total retail sales of goods and services, the report estimates that goods account for 62% and services 38%, of which non-catering services account for 30%.

• Wealth Effect AnalysisK-shaped Wealth Effect

  Asymmetric impact of asset price divergence on consumption

  Stabilization in first-tier city property markets and gains in AI-related stocks mainly benefit high-net-worth groups, while most households are still affected by declining real estate asset values and low participation in financial markets, limiting the overall boost to consumption.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China retail and consumer sectors

  Core subject covered by the report

  Strengths

  Non-catering services consumption maintains about 6.0% year-on-year growth, partially offsetting the slowdown in goods.

  Weaknesses

  Goods retail sales growth has fallen sharply, with the traditional retail measure dragged down by the payback effect in durable goods.

  Comparison

  Broad total retail growth of goods and services fell from 4.4% in 2025 to 2.8% in January-May 2026.

  Risks

  Weaker marginal policy stimulus, rising household saving propensity, and continued pressure from the real estate wealth effect on consumption.

• Subsidized durable goods such as autos, home appliances, and furniture

  Main source of drag

  Strengths

  Previously supported by the trade-in policy, which had generated strong demand release.

  Weaknesses

  After two years of stimulus, demand has been brought forward, and growth in autos, home appliances, furniture, and other categories fell sharply in January-May 2026.

  Comparison

  Growth in subsidized goods fell from 5.1% in 2025 to -6.4% in January-May 2026, while non-subsidized goods rose from 2.1% to 3.5%.

  Risks

  Subsidy rollback or diminishing marginal effects may keep sales under pressure.

• Services consumption

  Stable buffer within consumption

  Strengths

  Non-catering services account for about 30% of broad retail, with growth holding at 6.0% in January-May 2026.

  Weaknesses

  Services are non-standardized and prices fluctuate more, making them harder to stimulate directly through uniform subsidies.

  Comparison

  Goods growth fell to 1.2%, catering was 3.1%, while non-catering services were clearly stronger.

  Risks

  If income expectations continue to weaken, services consumption may also be affected with a lag.

• Wealth effect from real estate and stock markets

  Important backdrop affecting household consumption propensity

  Strengths

  Stabilization in first-tier city property markets and gains in AI-related stocks have improved the balance sheets of some high-net-worth groups.

  Weaknesses

  Most households have low participation in financial markets and remain affected by falling real estate asset values and income uncertainty.

  Comparison

  Wealth repair is concentrated in groups with lower marginal propensity to consume, making it hard to translate into broad consumption growth.

  Risks

  A widening K-shaped wealth effect may exacerbate consumption divergence and income inequality.

Key data

• Retail sales growth forecasts for Q2-Q4 20260.2%, 2.4%, 3.5%Previous forecasts were 2.8%, 3.5%, and 3.7%, respectively.
• Full-year 2026 retail sales growth forecast2.2%Lowered from the previous 3.2%.
• Nominal retail sales growth0.2% in April 2026, -0.6% in MayCompared with 2.4% in Q1 2026 and 3.7% in 2025, showing a clear slowdown.
• Sales growth of subsidized durable goods5.1% in 2025, -6.4% in January-May 2026Contributed -5.0 percentage points to the change in above-quota goods retail sales growth.
• Sales growth of non-subsidized goods2.1% in 2025, 3.5% in January-May 2026Offset the overall drag by 0.8 percentage points.
• Total retail growth of goods and services4.4% in 2025, 2.8% in January-May 2026The broader measure still shows that the slowdown mainly came from goods.
• Broad retail structureGoods 62%, catering 8%, non-catering services 30%Goods and services account for 62% and 38% of broad retail, respectively.
• Non-catering services growth6.0% in January-May 2026Basically flat versus 6.1% in 2025, showing that services consumption is relatively stable.
• Scale of trade-in fundingRMB150bn in Aug-Dec 2024, RMB300bn in 2025, RMB250bn in 2026The report believes the marginal effect of policy has weakened after multiple years of stimulus.

Impact & implications

The implication for investment and macro judgment is that the main constraints on China’s consumption recovery still lie in household balance sheets, the real estate wealth effect, and the social security system, rather than merely insufficient short-term subsidies. Durable goods-related chains may continue to face pressure from high bases and demand brought forward, while services consumption provides some cushion but is less sensitive to policy subsidies. Without progress in cleaning up bad real estate debt and pension reform, consumption growth may remain weak, and any improvement is more likely to be structural rather than broad-based.

Risks

• The marginal effect of the trade-in policy continues to decline, and the payback pressure on durable goods sales exceeds expectations.
• Falling real estate prices and deteriorating household balance sheets continue to suppress willingness to consume.
• Households repair balance sheets by cutting spending and increasing precautionary savings, causing consumption improvement to be weaker than headline data suggest.
• Although services consumption is stable, it is harder to stimulate quickly through subsidies, limiting policy transmission efficiency.
• Changes in statistical measures may affect understanding of the differences between traditional retail sales and broader consumption.

What to watch

• The divergence between subsequent total retail sales of consumer goods and the total retail measure of goods and services.
• Monthly sales growth of subsidized durable goods such as autos, home appliances, furniture, and communication equipment.
• Whether non-catering services consumption continues to maintain growth of around 6%.
• The divergence in property prices between first-tier and lower-tier cities.
• Changes in household saving rates, debt repayment behavior, and income expectations.
• Whether deeper cleanup of bad real estate debt and reform of the basic pension system are introduced.