Where is the money going: Five major areas of consumption upgrade

Core Viewpoints This article studies the transformation and upgrading of household consumption, starting from disposable income, constructing a concise map of household income and expenditure transmission, and analyzing the latest changes in eight major categories of consumption, including goods and services. Five leading areas of household consumption will emerge: first, technology durable goods, represented by AI+ replacement and upgrades, with a demand space of trillions; second, culture and tourism, which is currently the fastest-growing sub-sector in major consumption areas; third, the silver economy and healthcare, with a rapidly increasing old and young population, strong consumption capacity, and great potential; fourth, real estate upgrading, focusing on building quality homes and urban renewal, with a demand for hundreds of billions of square meters of old housing renovation; fifth, scarce gold, an important component of other goods, is experiencing a global central bank buying spree, and household gold consumption serves both preservation of value and consumption needs. With the promotion of new productive forces driving the improvement of total factor productivity, the potential for consumption upgrading is significant and sustainable. Key Points Currently, the transformation and upgrading of household consumption in China is driven by at least two reasons: First, after nearly 80 years of construction, China's production capacity has historically increased, and the endogenous laws of economic development are driving a joint transformation and upgrading of the demand side to achieve a new equilibrium in economic structure and growth momentum. Second, due to the short-term difficulties in eliminating the MAGA de-globalization disturbances, global economic and trade growth continues to face pressure, and the external demand environment for China's economy is fraught with uncertainties, which also requires domestic demand to play a greater role as a stabilizing ballast for economic circulation. Looking ahead, the prospects for the transformation and upgrading of household consumption in China are promising and sustainable: In the short term, the boost in household consumption mainly comes from the enhancement of consumer confidence, including increasing consumption capacity, expanding service consumption, optimizing the consumption environment, and improving social security. In the medium to long term, when the reorganization of factors driven by new productive forces leads to an improvement in total factor productivity (TFP), the supply boundary of the economy will expand significantly. Under these conditions, the expansion of consumption will have great potential and sustainability, allowing consumption upgrading to avoid constraints from costs, inflation, and other factors, achieving iterative industrial upgrading and a positive cycle of economic momentum. Main Text Introduction: The Transformation and Upgrading of Household Consumption This article studies household consumption in China, analyzing its current and next stages of transformation and upgrading, which will achieve a new balance of supply and demand in the national economy and bring new investment opportunities to the capital market. Household consumption is an important part of demand and is also a focus of recent policy attention and support. The arrival of the transformation and upgrading of household consumption in China is driven by at least two reasons. First, after nearly 80 years of construction, China's production capacity has historically increased, and the endogenous laws of economic development are driving a joint transformation and upgrading of the demand side to achieve a new equilibrium in economic structure and growth momentum. Second, due to the short-term difficulties in eliminating the MAGA de-globalization disturbances, global economic and trade growth continues to face pressure, and the external demand environment for China's economy is fraught with uncertainties, which also requires domestic demand to play a greater role as a stabilizing ballast for economic circulation Play a greater role. As shown in Charts 1-3, China has formed a comprehensive system breakthrough in modern industrialization through sustained high investment and high capital formation for over 20 years. Currently, final consumption by residents accounts for about 39.6% of GDP, and the overall situation is in the early stage of transformation and upgrading, exploring the bottom, stabilizing, and recovering. II. Resident Consumption in China: Current Situation and Future 2.1 Brief Diagram: The Transmission of Resident Income and Expenditure in China This article uses the per capita disposable income of national residents as the starting point for analyzing resident consumption, taking into account clear logic and accessible data, and constructs a concise transmission diagram of resident income and expenditure in China, as shown in Chart 4: In 2024, the national per capita disposable income is 41,314 yuan, regarded as 100% share. The remaining indicators in the transmission diagram represent the national per capita values for that year, with the unit in RMB yuan. The percentages indicate the proportion of disposable income. It should be noted that the proportions outside the transmission chain only represent the ratio of values and do not necessarily indicate that they are components of income. On the left side of disposable income are its four sources of income: wage income, operating income, property income, and transfer income, among which operating income is further divided into the primary, secondary, and tertiary industries. On the right side of disposable income, the first and second layers show the distribution of consumption, savings, and investment, while the third and fourth layers detail the eight major subcategories of consumption and their sub-items, as well as further penetration summaries of goods consumption and service consumption. Below disposable income is the situation of credit and the financial system, primarily starting from the per capita net new loans. The lower right corner provides a further concise overview of the real estate financial system, which directly affects the scale of commodity housing sales through down payments and also directly or indirectly influences the distribution of residents' investment, savings, and consumption. When comparing the changes in the five years before and after 2024 and 2019, as shown in Charts 4-5, we can find: Recently, residents' tendency to save is quite evident, and consumption has potential but needs to be activated. For example, per capita disposable income has accumulated a growth of about 34.4% over five years, with an annualized compound growth rate of about 6.1%, faster than the cumulative growth of per capita consumption expenditure of about 30.1% and an annualized compound rate of 5.5%. The proportion of new time deposits on the right side of the transmission chain has significantly increased, from 16.0% in 2019 to 20.5% in 2024. The growth rate of service consumption is faster than that of goods consumption, and its proportion is lower than that of goods consumption, indicating greater expansion space. For example, service consumption has accumulated a growth of about 31.6% over five years, with an annualized compound growth rate of about 5.7%, compared to the cumulative growth of fast-moving goods consumption of about 30.3% and an annualized compound rate of 5.4% The sales of commercial residential properties have shrunk, and the contraction of the real estate financial system is quite evident, but the space for continued contraction is limited. For example, the ratio of new per capita housing loans to residents' disposable income in 2024 is only 3.9%, significantly down by 8.7 percentage points from 12.6% in 2019, a contraction of over 2/3. New consumer credit for residents has also shrunk to a low level. If income expectations rise in the future, some areas of consumption expansion may welcome a double boost of income and credit recovery. For example, new per capita consumer credit in 2024 accounts for only 0.8% of disposable income monthly. Next, this article will focus on the consumption expenditure of Chinese residents, specifically the upper right part of the chart, further analyzing its structural changes and explaining the consumption transformation and upgrading occurring in China. 2.2 Consumption Upgrade: Structural Changes Dissected 2.2.1 New Changes in Eight Major Categories of Consumption In the structural dissection analysis of consumption upgrades, we first follow the framework of the eight major categories of consumption defined by China's National Bureau of Statistics. This article estimates the total expenditure scale of national residents' consumption in 2024, the distribution of primary and secondary structures, the growth rate of consumption amounts, and the corresponding CPI price growth rates—China's consumption is steadily showing upgrades in structural changes alongside the supply side, as illustrated in Chart 6: The growth and price distribution of the eight major categories of consumption are overall stable, especially with low CPI prices, reflecting the solid supply side of China's consumption, which is a necessary prerequisite for upgrading and expanding the demand side. Food, tobacco and alcohol, clothing, housing, and daily necessities, namely the "clothing, food, and housing" part, are overall showing "low inflation, moderate growth." They still account for the main share of consumption, but the internal structural trends are somewhat differentiated. The growth of traditional consumption in food, clothing, and housing is limited, requiring new supply product innovations, while dining out, tea drinks, and rent are relatively high-growth items, involving the service consumption sector. Transportation and communication, or the "travel" part, are overall showing "high growth, zero inflation," which is a classic feature of consumption expansion driven by technological progress. After technological innovation and industrial upgrading bring better products at lower prices, market consumption significantly expands. Education, culture, entertainment, and tourism involve composite consumption of goods and services. The previous consumption scale accounted for a small proportion and had a low growth rate, but the elasticity and potential for expansion are enormous. For example, tourism consumption is the only type among the main secondary classifications that shows "higher growth, higher inflation," reflecting strong potential demand and current supply shortages, which is a typical manifestation of the elasticity and potential of service consumption expansion. Healthcare maintains an overall trend of "stable prices, increasing volume," involving both goods and services. Currently, its proportion in total consumption scale is still relatively low, but with changes in population structure and improvements in healthcare levels, there is a high potential consumption space in the future Other goods and services reflect new growth in emerging products and modern service consumption, mainly in jewelry consumption, financial services, and legal services, showing overall stable growth. 2.2.2 Upgrade of Goods and Services A penetrating analysis of goods consumption and service consumption is another important perspective. After the supply-side upgrade leads to product upgrades, supported by new technologies, new products, and higher total factor productivity, the joint upgrade of service consumption and goods consumption, mutually promoting and resonating upward, is a necessary and inevitable economic and market opportunity. As shown in Chart 8-Chart 9, when divided by service consumption and goods consumption, the proportion of service consumption in total household consumption has risen to 46.1%, showing a state of high growth rate, large elasticity, and upward trend. When further penetrating the main sub-items of goods consumption and service consumption, reconstructing the eight categories of consumption sub-items from the statistical bureau into goods and services, we can find, as shown in Chart 10: 1) The composition of goods consumption, in terms of scale and growth, mainly includes food, durable goods, consumables, tobacco and alcohol beverages, medical and other goods. Among these, the three major weighted items of food, durable goods, and consumables are overall in a relatively stable state, with the market size of durable goods growing by about 695.2 billion yuan in the past three years, making it the largest incremental market for goods consumption; 2) The composition of service consumption, in terms of scale and growth, mainly includes housing, dining, living, transportation, communication, education, cultural tourism, medical, and other services. Among these, housing services remain the largest sub-item, while the consumption growth rate of cultural and tourism services significantly exceeds that of other sub-items, with a market size growth of about 471.7 billion yuan in the past three years, approaching the market increment of food goods. 2.3 Broad Space: Which Consumption Leads the Upgrade? Overall, which areas of consumption will lead the upgrade in the future, and have broad space? We focus on five areas, including technology durable goods, culture and tourism, silver economy and health, real estate upgrade, and scarce gold. Relevant policy deployments can be referred to in the previous report "Spring Thunder Sounds, Everything is New - Insights from the 2025 Government Work Report," which will not be repeated here. 2.3.1 Product Upgrade: Technology Durable Goods, Trillion Yuan Replacement Demand The consumption upgrade of durable goods, represented by the replacement and renewal of AI+ artificial intelligence, is the direct direction of the next stage of consumption transformation and upgrading, as well as the original intention of the "technology, production, consumption" spiral resonance expansion. In modern commodity production, the technological content of advanced durable goods consumption is high, significantly enhancing residents' happiness. In the context of a de-globalization disturbance environment, moderately advanced replacement is also beneficial for reserving the ability to cope with uncertainties. With the rapid implementation of AI technology in application terminals, the potential consumption space for the AI replacement and upgrade of durable goods held by households in China alone is nearly one hundred trillion, which can be released annually in subsequent years according to a certain ratio. As shown in Chart 11, based on the main durable goods held by Chinese households (according to statistical bureau data) and estimated average replacement prices (based on Deepseek's estimation of the average market price of ordinary mid-range products, actual AI new products may be higher than the current average price), the total potential replacement consumption space for corresponding varieties can be obtained. 2.3.2 Service Upgrade: Culture and Tourism, High Elasticity of Billion-Year Growth The consumption upgrade in culture and tourism is currently the fastest-growing and most elastic area among major consumption segments. Especially since 2024, a series of phenomenal products such as "Black Myth: Wukong" and "Nezha 2" have gained widespread attention, resonating with technological innovation, cultural confidence, and cultural tourism consumption, promoting the continuous release of cultural tourism consumption potential. As shown in Chart 12, in 2024, the scale of cultural tourism and tourism consumption expenditure by Chinese households achieved double-digit annual growth of 21% and 36%, respectively, with an annual market increment scale exceeding one hundred billion. 2.3.3 Health Upgrade: Silver Economy and Medical Care, Great Potential of New and Old Population The rapid increase in the consumption capacity of the new and old population is an important change in China's population structure, and the corresponding demand potential for silver-haired consumption is enormous. In the next 10 years, the first batch of baby boomers after the founding of the country will gradually enter old age. This new and old population has a relatively high overall education level, wealth reserve, and consumption willingness, leading to significant potential demand for medical care, health maintenance, nursing, tourism, and other silver economy sectors. As shown in Chart 13-Chart 14, except for the special period of the pandemic, China's residents' medical and healthcare consumption has steadily increased, with annual market spending reaching about 3.5 trillion. The National Health Commission predicts that by 2035, the elderly population in China will reach about 400 million, accounting for over 30% of the total population, nearly doubling the current population. This means that even without considering the high consumption capacity of the new and old population, assuming per capita consumption levels remain unchanged, the corresponding market scale for elderly consumption will also approach doubling. 2.3.4 Real Estate Upgrade: Build Good Houses, 10 Billion Square Meters of Urban Renewal The upgrade of real estate consumption mainly comes from technological advancements, the construction of "good houses," and urban renewal and transformation. The demand for the renovation of existing commercial housing and old housing in China is growing rapidly. Ni Hong, the Minister of Housing and Urban-Rural Development, stated at this year's Two Sessions press conference that all old residential communities built before 2000 should be included in the renovation scope, implementing renovations according to local conditions and building "good houses." This not only provides a broad application space for new technologies, new products, and new materials but also releases huge potential for expanding domestic demand and promoting consumption. According to data from the National Bureau of Statistics, we estimate that the potential demand for the renovation of existing old housing in China currently reaches 10 billion square meters, and this will continue to increase year by year. As shown in Chart 15, after the housing reform in 1998, China's commercial housing market gradually became the main body of housing supply, and after 2018, old houses over 20 years began to appear gradually, with a current scale of about 1.9 billion square meters. Meanwhile, the existing old housing and unit housing built before the establishment of the commercial housing market have a current age of at least 30 years or more, with a scale of about 9.1 billion square meters. Considering that China's housing construction technology has improved significantly in the past 20-30 years and that the living standards of early housing were relatively low, the total demand for the renovation and upgrade of existing housing has reached a scale of 10 billion square meters. 2.3.5 Other Upgrades: Scarce Gold, Consumption Preservation is Mutually Beneficial In terms of other consumer goods, the recent expansion in price and scale has mainly been driven by the rise in gold prices and increased gold consumption. We see that not only households but also global central banks are generally increasing their gold holdings. Considering the ongoing pressure from the complex global economic and trade environment, gold, with its scarce attributes, has become a mutually beneficial option for consumption preservation. As shown in Chart 16, global central banks and foreign exchange reserve institutions are significantly increasing their gold holdings while reducing their dollar assets. In the 15 months from the beginning of 2024, 49 major countries and regions have collectively increased their gold reserves by about 460 tons, accounting for approximately 9.2% of the total global gold supply in 2024. The proportion of gold in foreign exchange reserves has increased from about 8.2% to about 9.4%, and gold prices have historically surpassed $3,000 per ounce for the first time. III. Conclusion: Reform and Innovation Support, Upgrades are Inevitable 3.1 Short-term Outlook: Boosting Confidence, Household Consumption May Exceed Expectations At the end of the article, if we revisit the summary chart of residents' income and expenditure in our country, the per capita disposable income in 2024 is 41,314 yuan; among which, consumption expenditure is 28,227 yuan, accounting for only 68.3%; savings and investments amount to 13,093 yuan, accounting for 31.7%, with time deposits at 8,468 yuan, accounting for 20.5%; while the proportion or ratio of new demand deposits, consumer loans, and housing loans to per capita disposable income does not exceed 4%, significantly lower than the approximately 6%-17% level in 2019; this indicates that the nominal income and expenditure surplus of the resident sector exceeds 18.4 trillion yuan for the year—therefore, in the short term, the boost in resident consumption mainly stems from the enhancement of consumer confidence, including increasing consumption capacity, expanding service consumption, optimizing the consumption environment, and improving social security. As shown in Chart 17-Chart 18, the expectation of a contraction in resident consumption may not be accurate. In fact, as we mentioned in our report "Five Major Expectations for 2025," with the support of industrial upgrades and policy actions in our country, as long as we adhere to the implementation of the various policy deployments from the Two Sessions, the next phase of domestic demand expansion and consumption boost is conditionally expected to exceed expectations. Our country is currently one of the few economies in the world with relatively high growth and low inflation, with ample policy space and a robust economic outlook. 3.2 Medium to Long Term: After TFP Improvement, Consumption Potential is Strong From a medium to long-term perspective, when the reorganization of factors driven by new quality productivity leads to an improvement in total factor productivity (TFP), the economic supply boundary expands significantly. Under this condition, the potential for consumption expansion is large and has strong momentum. Consumption upgrades will be free from constraints such as costs and inflation, achieving iterative industrial upgrades and a positive cycle of economic momentum. As shown in Chart 19-Chart 24, from 2024 to 2025, technological innovation and industrial revolution are occurring in our country. From "Made in China 2025" to strategic emerging industries and future industries, the software and hardware products of new quality productivity are continuously breaking through. In the asset market, the production and consumption sectors of new quality productivity are also growing comprehensively. Author: Huang Wentao, Zhu Linning, Source: CITIC Securities Chief Economist, Original Title: "Where Does the Money Go: Five Major Areas of Consumption Upgrade - Series on Boosting Consumption Part One" Risk Warning and Disclaimer The market has risks, and investment requires caution. 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