I strongly agree with Prof. Milanovic’s reading of the data. A significant part of China’s unusually weak consumption over the past five years has indeed come from a sharp rise in the saving rate of the urban elite—not simply from inadequate social transfers, a low household share of national income, or excessive corporate savings.
But what caused this unusually sharp divergence between urban income and consumption?
The most important factor, in my view, is the negative wealth effect from the collapse in urban property prices.
Roughly 85% of China’s residential property wealth is concentrated in urban areas. Over the past five years, the value of urban residential property has fallen from roughly RMB 350 trillion to around RMB 250 trillion—a destruction of about RMB 100 trillion in household wealth, equivalent to almost two years of China’s total household consumption.
And the losses have been highly unequal.
For affluent urban households, property once accounted for as much as 65% of household wealth. When the value of the dominant asset on your balance sheet falls by one-third or more, consumption cannot remain unaffected even if your current income continues to rise.
The immediate household response is predictable: trade down in consumption, postpone discretionary spending, rebuild balance sheets, and raise precautionary savings.
This helps explain Milanovic’s most striking finding. The fall in consumption among China’s urban rich may have less to do with falling income than with a massive deterioration in perceived wealth.
China’s consumption problem over the past five years has therefore also been a balance-sheet problem.
Thank you. Much appreciated. I go only by income and consumption survey data. They provide a description. But I can totally see that the cause is a household balance sheet issue. It used to be called the Pigou effect.
Yes, growth in asset value has always provided a wealth effect, and the decline in asset value for homeowners from the long-standing real estate overhang seems a very plausible explanation for the decline in consumption.
My guess is the urban rich suppressed consumption to invest in residential real estate which turned out to be either very expensive consumption or wasted capital, depending on the point of view. Varying by city, real estate prices peaked between 2017-2022, and volume peaks after price, so it makes sense. Ratio of financial assets to income (household deposits, wmp, other financial instruments) didn't increase noticeably over this period. I remember one new concern bank analysts started having with China Merchant Bank (the leading retail bank) in 2018 was that "middle class" (200k-8mm rmb per account, this probably corresponds to the urban rich demographics in the world bank data) accounts growth was anemic whereas private bank (>8mm rmb, numbering in the low 10,000s) was strong. So it seems the percentiles data has some factual basis, though I question the magnitude of -16% decline, and the explanation is likely to be found in changes to non-financial investments, which for households are mainly real estate.
Branko: Another factor may be the government's restriction of personal movement during Covid. It might have been harder to consumer in cities than in the countryside>
Chat GPT - Aug. 11, 2026:
How did the Chinese government restrict personal movement during Covid? What was the impact on urban v. rural populations? Was it easier to enforce the "stay at home" order in cities?
China restricted movement during COVID through citywide lockdowns, neighborhood-level sealing, transportation shutdowns, digital pass systems, and mass testing, but the impact and enforceability differed sharply between urban and rural areas. Yes — enforcement was generally easier in cities, though for reasons that are structural rather than cultural.
🚧 How China restricted movement
Key mechanisms of movement control — all documented in the sources — included:
Transportation shutdowns: Wuhan’s lockdown halted high‑speed rail, buses, and most intercity travel. Transportation controls were a core containment tool.
Neighborhood sealing & access checkpoints: Urban villages and housing communities in Shenzhen used controlled entry points and community-level monitoring.
Digital mobility tracking: City-level mobility data (Baidu migration, phone-based health codes) allowed authorities to monitor and restrict movement.
Policy styles varied by region: Guangdong used “society‑mobilizing” enforcement, Hong Kong used market-based approaches, and Macau used targeted controls — showing that restrictions were not uniform nationwide.
These tools were most effective in dense urban areas with formalized infrastructure.
🏙️ Urban vs. Rural: Different impacts
Urban areas
Urban residents experienced more intense and immediate mobility restrictions, because:
Cities have dense transportation networks, which were shut down early and aggressively. Wuhan’s high-speed rail connectivity was a major transmission channel, so urban transport was heavily restricted.
Digital mobility tracking was more effective because urban residents use smartphones and public transit more frequently.
Urban populations therefore saw larger and faster drops in mobility, as confirmed by city-level mobility studies.
Rural areas
Rural areas experienced less uniform and less enforceable restrictions, because:
Rural residents rely less on public transit and more on private or informal transport, which is harder to monitor.
Villages often have multiple informal entry points, making perimeter control more difficult.
Digital tracking systems were less consistently adopted in rural regions.
Studies of migration behavior show that rural residents engaged in counter‑urbanization (moving back to rural hometowns) during the pandemic, indicating more fluid mobility patterns than in cities.
✔️ Was enforcement easier in cities?
Yes. The evidence strongly suggests that urban mobility was easier to restrict due to:
Physical infrastructure: gated communities, checkpoints, and controlled transit hubs.
Digital infrastructure: widespread smartphone use enabling health-code enforcement.
Administrative capacity: urban governments have more personnel and resources for monitoring.
Rural enforcement was more diffuse, with greater reliance on local village committees and informal social pressure rather than formal checkpoints or digital systems.
📊 Summary Table
Factor Urban Areas Rural Areas
Movement control tools Digital passes, gated compounds, transit shutdowns Village checkpoints, local committees
Mobility reduction Large, rapid drop (city-level data) Smaller, uneven drop
I think one reason for the high saving's rate is the concern of future geopolitical shock. Covid was an example where unlike the U.S. Chinese has to depend on its own saving during the pandemic. Now suppose there is a crisis over Taiwan, which many anticipate, then who knows what may happen to the Chinese and world economy. Just my two cents.
According to José Gabriel Palma, the Chinese upper class is politically forced to save and to invest in productive businesses in a way that, for (Palma's) example the Latin American upper class isn't.
While it is true that the saving rate of lower income deciles is high, lowering this rate may not be sufficient to raise consumption as the the total value of their saving is low. The vast bulk of saving is from the upper decile of incomes. Raising pensions is unlikely to lower this total.
Rather structural factors may have some role here. Notably, the almost complete absence of income tax, capital gains tax and inheritance tax on the income from capital - the tax code has some of these taxes but temporary pauses had been in place for many when I last looked several years ago. Of course, substitution effects for saving are often found to be low internationally but still, if these taxes are still low or non-existent, raising them might help boost consumption
I always heard that China doesn't have a public health system and public pensions are terrible. Is it true? Maybe they are preserving their future quality of life.
Not disputing the possible structural explanations, but just an anecdotal data point. A Beijing-based colleague returned to her family home in Sichuan in the early Covid days. She ended up being stuck there for more than a year, unable to return to Beijing because of travel and other restrictions. Income in Beijing, consumption in Sichuan (but less than usual because staying with family). There must have been millions like her.
That said, increased savings to make up for the loss of value of property assets is a very compelling hypothesis. This would be a reason behind the flood of money into Hong Kong IPOs.
I strongly agree with Prof. Milanovic’s reading of the data. A significant part of China’s unusually weak consumption over the past five years has indeed come from a sharp rise in the saving rate of the urban elite—not simply from inadequate social transfers, a low household share of national income, or excessive corporate savings.
But what caused this unusually sharp divergence between urban income and consumption?
The most important factor, in my view, is the negative wealth effect from the collapse in urban property prices.
Roughly 85% of China’s residential property wealth is concentrated in urban areas. Over the past five years, the value of urban residential property has fallen from roughly RMB 350 trillion to around RMB 250 trillion—a destruction of about RMB 100 trillion in household wealth, equivalent to almost two years of China’s total household consumption.
And the losses have been highly unequal.
For affluent urban households, property once accounted for as much as 65% of household wealth. When the value of the dominant asset on your balance sheet falls by one-third or more, consumption cannot remain unaffected even if your current income continues to rise.
The immediate household response is predictable: trade down in consumption, postpone discretionary spending, rebuild balance sheets, and raise precautionary savings.
This helps explain Milanovic’s most striking finding. The fall in consumption among China’s urban rich may have less to do with falling income than with a massive deterioration in perceived wealth.
China’s consumption problem over the past five years has therefore also been a balance-sheet problem.
Thank you. Much appreciated. I go only by income and consumption survey data. They provide a description. But I can totally see that the cause is a household balance sheet issue. It used to be called the Pigou effect.
Yes, growth in asset value has always provided a wealth effect, and the decline in asset value for homeowners from the long-standing real estate overhang seems a very plausible explanation for the decline in consumption.
My guess is the urban rich suppressed consumption to invest in residential real estate which turned out to be either very expensive consumption or wasted capital, depending on the point of view. Varying by city, real estate prices peaked between 2017-2022, and volume peaks after price, so it makes sense. Ratio of financial assets to income (household deposits, wmp, other financial instruments) didn't increase noticeably over this period. I remember one new concern bank analysts started having with China Merchant Bank (the leading retail bank) in 2018 was that "middle class" (200k-8mm rmb per account, this probably corresponds to the urban rich demographics in the world bank data) accounts growth was anemic whereas private bank (>8mm rmb, numbering in the low 10,000s) was strong. So it seems the percentiles data has some factual basis, though I question the magnitude of -16% decline, and the explanation is likely to be found in changes to non-financial investments, which for households are mainly real estate.
Branko: Another factor may be the government's restriction of personal movement during Covid. It might have been harder to consumer in cities than in the countryside>
Chat GPT - Aug. 11, 2026:
How did the Chinese government restrict personal movement during Covid? What was the impact on urban v. rural populations? Was it easier to enforce the "stay at home" order in cities?
China restricted movement during COVID through citywide lockdowns, neighborhood-level sealing, transportation shutdowns, digital pass systems, and mass testing, but the impact and enforceability differed sharply between urban and rural areas. Yes — enforcement was generally easier in cities, though for reasons that are structural rather than cultural.
🚧 How China restricted movement
Key mechanisms of movement control — all documented in the sources — included:
Transportation shutdowns: Wuhan’s lockdown halted high‑speed rail, buses, and most intercity travel. Transportation controls were a core containment tool.
Neighborhood sealing & access checkpoints: Urban villages and housing communities in Shenzhen used controlled entry points and community-level monitoring.
Digital mobility tracking: City-level mobility data (Baidu migration, phone-based health codes) allowed authorities to monitor and restrict movement.
Policy styles varied by region: Guangdong used “society‑mobilizing” enforcement, Hong Kong used market-based approaches, and Macau used targeted controls — showing that restrictions were not uniform nationwide.
These tools were most effective in dense urban areas with formalized infrastructure.
🏙️ Urban vs. Rural: Different impacts
Urban areas
Urban residents experienced more intense and immediate mobility restrictions, because:
Cities have dense transportation networks, which were shut down early and aggressively. Wuhan’s high-speed rail connectivity was a major transmission channel, so urban transport was heavily restricted.
Housing compounds in cities (commodity housing, gated communities) allowed strict perimeter control, reducing mobility sharply.
Digital mobility tracking was more effective because urban residents use smartphones and public transit more frequently.
Urban populations therefore saw larger and faster drops in mobility, as confirmed by city-level mobility studies.
Rural areas
Rural areas experienced less uniform and less enforceable restrictions, because:
Rural residents rely less on public transit and more on private or informal transport, which is harder to monitor.
Villages often have multiple informal entry points, making perimeter control more difficult.
Digital tracking systems were less consistently adopted in rural regions.
Studies of migration behavior show that rural residents engaged in counter‑urbanization (moving back to rural hometowns) during the pandemic, indicating more fluid mobility patterns than in cities.
✔️ Was enforcement easier in cities?
Yes. The evidence strongly suggests that urban mobility was easier to restrict due to:
Physical infrastructure: gated communities, checkpoints, and controlled transit hubs.
Digital infrastructure: widespread smartphone use enabling health-code enforcement.
Administrative capacity: urban governments have more personnel and resources for monitoring.
Higher perceived risk: dense cities faced higher case counts, prompting stricter compliance.
Rural enforcement was more diffuse, with greater reliance on local village committees and informal social pressure rather than formal checkpoints or digital systems.
📊 Summary Table
Factor Urban Areas Rural Areas
Movement control tools Digital passes, gated compounds, transit shutdowns Village checkpoints, local committees
Mobility reduction Large, rapid drop (city-level data) Smaller, uneven drop
Enforcement difficulty Lower — easier to enforce Higher — dispersed geography
Impact on daily life Strong restrictions, limited travel More flexibility, but less monitoring
I think one reason for the high saving's rate is the concern of future geopolitical shock. Covid was an example where unlike the U.S. Chinese has to depend on its own saving during the pandemic. Now suppose there is a crisis over Taiwan, which many anticipate, then who knows what may happen to the Chinese and world economy. Just my two cents.
According to José Gabriel Palma, the Chinese upper class is politically forced to save and to invest in productive businesses in a way that, for (Palma's) example the Latin American upper class isn't.
That would also be a key to China's fast rise.
Richard Herd
While it is true that the saving rate of lower income deciles is high, lowering this rate may not be sufficient to raise consumption as the the total value of their saving is low. The vast bulk of saving is from the upper decile of incomes. Raising pensions is unlikely to lower this total.
Rather structural factors may have some role here. Notably, the almost complete absence of income tax, capital gains tax and inheritance tax on the income from capital - the tax code has some of these taxes but temporary pauses had been in place for many when I last looked several years ago. Of course, substitution effects for saving are often found to be low internationally but still, if these taxes are still low or non-existent, raising them might help boost consumption
I always heard that China doesn't have a public health system and public pensions are terrible. Is it true? Maybe they are preserving their future quality of life.
Not disputing the possible structural explanations, but just an anecdotal data point. A Beijing-based colleague returned to her family home in Sichuan in the early Covid days. She ended up being stuck there for more than a year, unable to return to Beijing because of travel and other restrictions. Income in Beijing, consumption in Sichuan (but less than usual because staying with family). There must have been millions like her.
That said, increased savings to make up for the loss of value of property assets is a very compelling hypothesis. This would be a reason behind the flood of money into Hong Kong IPOs.
Wow. Thank you for bringing this up. I had no idea.