Signs of domestic demand structure recovery have emerged! Institutions: Optimistic about the consumer sector

The consumer sector has been sluggish for many days, but more and more institutions are increasingly optimistic about consumption.

Recently, teams from Shenwan Hongyuan, Guotai Haitong Research Institute, and others in macro and strategy have been actively speaking out, clearly expressing confidence in the improvement of the consumer sector.

Some institutions believe that, in the past few years, the real estate industry has significantly “dragged down” consumption. However, the fundamentals of the real estate sector have been largely cleared, and it is entering a bottoming-out phase. As the economic development pattern led by domestic demand gradually solidifies, the real estate market is steadily stabilizing, and the internal demand real estate chain will become an important driver of China’s “transformation bull” market, bringing continuous investment opportunities.

The Starting Point of a “U-Shaped” Reversal

“Multiple pieces of evidence indicate that China may currently be at the starting point of a ‘U-shaped’ reversal in consumption tendencies,” said Zhao Wei, Chief Economist at Shenwan Hongyuan, in a recent report. The market generally believes that consumption will continue to be affected by the downturn in real estate, but this is not the case; international experience shows that after the latter half of real estate adjustments, consumption tendencies tend to rise first, and China may currently be at this “inflection point.”

Zhao Wei analyzed that 2015 was a crucial turning year for the impact of real estate on the macroeconomy. Before 2015, rising housing prices mainly influenced the economy through “income effects” and “wealth effects.” After 2015, the impact of rising housing prices gradually shifted to being dominated by “crowding-out effects.” Post-2015, the housing price-to-income ratio soared, increasing residents’ living costs.

Zhao Wei stated that around 2026, as the “crowding-out effect” significantly weakens, a new cycle of increased consumption tendency may begin. Indicators such as the national housing price-to-income ratio have fallen back to pre-2015 levels, suggesting that the fluctuations in housing prices and their concentrated “drag” on the economy are coming to an end. The three major effects are now at a new “balance point.” Data across provinces show that in regions with significant housing price declines from 2022 to 2024, consumption tendencies have actively improved since 2024, with places like Fujian, Zhejiang, Hebei, Hunan, and even some central and western regions returning to historical highs.

Guotai Haitong Research Institute Director Lu Ying recently told Securities Times and China Securities Journal that the real estate industry has undergone years of decline, completed deep adjustments, and entered a bottoming phase. By the fourth quarter of 2025, the sales area of real estate had fallen about 51% from its peak, new construction area down about 74%, and residential investment as a share of GDP had decreased by 5.6%. Both the absolute value and the decline magnitude are close to global small-bubble experiences, with housing prices approaching bottom levels. The fundamentals of the industry have been largely cleared, and it is entering a bottoming-out phase.

Signs of a Recovery in Domestic Demand Structure Have Emerged

Lu Ying indicated that signals of a recovery in the domestic demand structure are already visible, and rising prices will facilitate the internal demand cycle. Moderate price increases are a key sign of recovery; in December 2025, the CPI year-on-year rose 0.8%, with core CPI exceeding 1% for four consecutive months. The sustained warming of CPI and core CPI activates consumption, improves expectations, and boosts corporate profits, helping internal demand break out of the vicious cycle of “low prices—low profits—weak demand,” entering a positive cycle of “price recovery—profit improvement—income growth—consumption expansion.”

Meanwhile, a new round of policies directly targeting long-term constraints on consumption is being implemented. Large-scale “old-for-new” programs are stimulating bulk consumption; policies to implement paid leave and spring/autumn holidays are releasing the potential for service consumption; reforms in social security and household registration systems aim to solve the “dare not to consume” problem; the construction of a unified national market aims to eliminate barriers to consumption; monetary and financial tools are being used to lower financing costs. Particularly, equalizing public services for the 170 million rural migrant workers will unleash trillions of yuan in consumption growth.

Zhao Wei also noted that since the end of 2024, signs of the rapid fading of the “scar effect” post-pandemic have become evident, characterized by continuous improvement in mobility data and the bottoming and rebound of prices for some optional consumer goods, indicating that the bottoming and improvement of consumption behavior has begun. International experience shows that once per capita GDP exceeds $10,000 and urbanization rate surpasses 70%, both supply and demand in the service sector will grow rapidly, driving continued upgrades in consumption structure and expanding consumption space. China is close to this stage. Additionally, at the start of the “14th Five-Year Plan,” central ministries and local governments have been actively pushing for a good start, with policies focusing on expanding domestic demand and promoting consumption, such as optimizing personal consumer loan subsidies; policies to “invest in people” and open up the service industry abroad will continue to expand consumption space. Some innovative measures, like one-time credit repair and prize-based invoicing, could be future “magic tricks” to restore consumer confidence.

“Currently, China’s economic work is shifting focus toward domestic demand-led growth. The expansion of domestic demand is reaching a historic inflection point. After deep adjustments, the real estate industry has entered a bottoming-out phase, with valuation and holdings of the internal demand real estate chain both at historic lows. Under the continuous policy efforts and marginal improvements in fundamentals, this presents a good opportunity for strategic deployment. The recovery and improvement of the consumer sector are vital supports for China’s ‘transformation bull’ in the stock market and help outline a clear investment mainline for the capital market.”

Layout: Liu Junyu

Proofreading: Wang Chaoquan