China Is Paying People to Shop. It’s a Boom for Tech.

Instead of putting money in households’ pockets, China rewards purchases that can help manufacturers increase production and reduce costs. (GREG BAKER / AFP via Getty Images)

Key Points

• Beijing allocated about $37 billion this year for a consumer trade-in program to build markets for technologies it wants its factories to dominate.
• The program helped drive a 27.3% jump in communications-equipment sales at larger retailers in August compared with a year earlier.
• Despite the subsidies, China’s total retail sales grew just 0.4% in August, and automobile retail sales by value plunged 18.5%.

China is paying consumers to buy new things. It is also making some fairly specific suggestions about what those things should be.

Beijing has allocated 250 billion yuan, about $37 billion, this year for its consumer trade-in program. By August, the program had supported 1.55 trillion yuan in sales of eligible goods, according to the National Development and Reform Commission. The final installment went to local governments in late September.

It sounds like old-fashioned stimulus: Help households replace aging products and hope they keep spending. But the shopping list tells another story. China is using consumer subsidies to build markets for technologies it wants its factories to dominate, from artificial-intelligence glasses to energy-efficient appliances.

The results are strikingly uneven. Communications-equipment sales at larger retailers jumped 27.3% in August from a year earlier and 16.3% over the first eight months. Sales of smart glasses on major shopping platforms surged 120% during that period, according to the Commerce Ministry. Consumers purchased 108 million digital and smart products through the subsidy program.

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The government is giving shoppers a reason to try gadgets that might otherwise remain novelties. Phones, tablets, smartwatches and smart glasses priced at 6,000 yuan or less qualify for a 15% subsidy, capped at 500 yuan per item. A 3,000-yuan pair of AI glasses, for example, can come with a 450-yuan discount. The program also covers six categories of appliances, but only models meeting the highest energy- or water-efficiency standards.

That selectivity is deliberate. At a government briefing, Vice Commerce Minister Sheng Qiuping described the strategy as using “new demand to guide new supply, and new supply to create new demand.” Subsidies, he said, were designed to encourage purchases of greener appliances and vehicles.

This is industrial policy conducted at the checkout counter. Instead of simply putting money in households’ pockets, Beijing rewards purchases that can help manufacturers increase production, bring down costs and cultivate entirely new product categories.

For investors, that creates opportunities beyond the brands displayed in stores. Chinese smartphone makers Huawei and Xiaomi are pursuing AI-enabled devices. Component manufacturers stand to benefit, too. Goertek , the Shenzhen-listed electronics supplier, told institutional investors in September that AI smart glasses could be “one of the categories with the greatest growth potential.” It pointed to opportunities in optics, sensors, speakers and other components that make the devices work.

The implications for foreign companies are more complicated than a subsidy-driven victory for Chinese brands. The rules don’t exclude Apple . Its qualifying iPhones can receive the same discount as domestic competitors, and Apple captured a 19% share of Chinese smartphone shipments in the second quarter, according to research firm Omdia, second only to Huawei.

Tesla can also benefit when buyers trade in eligible cars for qualifying electric vehicles. The subsidy for scrapping an older vehicle and buying an EV reaches 12% of the new car’s price, up to 20,000 yuan. Yet selling cars has become harder for almost everyone.

Automobile retail sales by value plunged 18.5% in August, official data show. September brought a sharper warning: Domestic passenger-car sales by volume fell about 28%, according to industry figures. Electric vehicles and plug-in hybrids are taking a larger share of the market, but that doesn’t mean the market itself is growing.

Tesla is now offering its own limited-time reductions of 5,000 yuan on the Model 3 and 7,000 yuan on the Model Y in China, underscoring how government help can coexist with bruising price competition.

The broader spending picture is hardly exuberant. Total retail sales grew just 0.4% in August. The value of subsidized product sales isn’t the same as spending created by subsidies; plenty of customers would have bought those goods anyway.

And in the first eight months of last year, the trade-in program was associated with more than 2 trillion yuan in sales, versus 1.55 trillion yuan this year. The comparison isn’t exact because Beijing narrowed eligibility in some categories. The central government also reduced annual funding from 300 billion yuan to 250 billion.

There is another risk: bringing purchases forward. A discounted smartphone bought this autumn may be one that a consumer would otherwise have purchased next spring. Subsidies can also shift spending away from restaurants, travel or other goods without persuading households to spend more overall.

“Consumers are expected to be more cautious about upgrading their devices,” said Omdia analyst Hayden Hou.

That is the limit of Beijing’s experiment. A government can make a new gadget cheaper and give its manufacturers a head start. Convincing cautious households to keep opening their wallets is a different challenge.

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