In a historic move, China is shifting its economic policy focus towards boosting consumer spending, departing from its decades-long reliance on investment-driven growth. Beijing is expected to issue sovereign bonds worth 2 trillion yuan ($284 billion) this year to fund subsidies for household purchases and child support, marking a significant step in the country’s efforts to stimulate domestic consumption. The shift comes as policymakers attempt to stabilize growth, with China targeting a 5% GDP increase for 2024 despite a recent downturn in economic data.

Economists have long urged China to stimulate consumer demand, warning that without reforms, the nation could face a prolonged period of low growth, similar to Japan's experience in the 1990s. "It's monumental - a landmark event that the policy mindset has reversed," noted Tianchen Xu, an economist at the Economist Intelligence Unit.

China’s current growth model, rooted in the 1980s, has historically focused on investment in property, infrastructure, and industry. This has led to overcapacity and a significant debt buildup since the global financial crisis, with household spending now contributing less than 40% of annual economic output—20 points below the global average. Meanwhile, investment accounts for an excessive 20 points above the global norm.

While the short-term stimulus is expected to help meet the 2024 growth target, experts caution that China’s long-term structural challenges remain. Michael Pettis, a senior fellow at Carnegie China, highlighted that rebalancing the economy towards consumption would require a fundamental shift in policies that have historically favored investment over household income. "Rebalancing will require a shift in the economic model that will reverse decades of implicit transfers where households have subsidized investment and production," Pettis explained.

China’s socioeconomic policies, such as low deposit rates, limited labor rights, and a high-tax system on personal income, have further strained household finances. Meanwhile, businesses in strategic sectors, including electric vehicles and green energy, continue to receive tax incentives, prioritizing technological advancement and national security over consumer spending.

Juan Orts, a China economist at Fathom Consulting, warned that any abrupt changes to the current model could trigger a recession. “Rebalancing towards consumption would shrink the manufacturing sector and lead to a sharp drop in investment,” Orts said. He predicted that China is more likely to undergo a slow, gradual shift, risking "Japanification"—a prolonged period of low growth.

As China faces mounting economic pressures, Beijing is expected to issue more debt to finance the new fiscal measures. Analysts warn that while this could support short-term goals, failing to transform the economic model could lead to long-term imbalances. "If Beijing doesn't transform the growth model, the imbalances will continue to build," Pettis added, noting that China could eventually face even greater challenges, without the benefit of a strong central government balance sheet to weather potential disruptions.

With the world’s second-largest economy at a critical juncture, China's next steps will likely shape its economic trajectory for years to come.