What Will Happen to China’s Economy in 2025?
China’s Economy Finally Turning the Corner
China’s gross domestic product (GDP) growth slowed during the first three quarters of 2024, from 5.3% to 4.7% to 4.6%, raising fears that the country would not achieve its annual growth target of around 5%. However, the latest data suggests that China’s economy is finally turning the corner.
Recent Developments
Economic activity in China has been relatively weak since the Covid-19 crisis. This was not unexpected, at least not at first. Three years of pandemic lockdowns strained household, corporate, and local-government balance sheets. Declining business confidence – partly a response to a regulatory crackdown on finance, the property sector, and the platform economy – did not help matters.
Government’s Response
In late September, People’s Bank of China governor Pan Gongsheng unveiled three measures: a reduction in banks’ reserve ratio, a policy-rate cut, and the creation of monetary-policy instruments to support the stock market. On October 12, Finance Minister Lan Fo’an announced that new fiscal measures would focus on addressing local-government debt problems, stabilizing the real-estate market, and supporting employment. He followed this announcement with a 10 trillion yuan debt-swap plan for local governments.
Early Indicators Suggest a Turning Point
Recent data on high-frequency economic indicators – which tend to be the quickest to respond to macroeconomic-policy changes – suggests that the government’s actions began taking effect almost immediately. In October, total "social finance" (total financing to the real economy) was up by 7.8% year-on-year (YoY), and outstanding bank loans had increased by 7.7%. Retail sales had risen by 4.8% YoY, and by 1.6 percentage points from the previous month. The manufacturing purchasing managers’ index reached 50.1, after three months of sub-50 readings, and increased again, to 50.3, in November.
Outlook for 2025
The outlook for 2025 is less clear. If China is to achieve 5% GDP growth next year – assuming this is the government’s target – policymakers will have to overcome three key challenges, starting with stabilizing the property sector, which contributes about 20% of GDP growth and accounts for 70% of household wealth.
Key Challenges
- Stabilizing the Property Sector: The government must address the property sector, which has been a key driver of growth. Real-estate investment has been weak, and land sales have been declining.
- Local Governments’ Balance Sheets: The government must urgently transfer a significant amount of general-purpose revenue to local authorities. More fundamentally, China needs to reconfigure the balance of fiscal responsibilities across levels of government.
- US Tariffs: China will also face significant challenges as a result of US president-elect Donald Trump’s vow to impose 60% tariffs on all imports from China during his first year in office.
Conclusion
China needs both a decisive stimulus package and structural reforms to boost confidence among consumers, investors, and entrepreneurs. A robust fiscal-policy component must come first, followed by a focus on structural reforms.
FAQs
- What is the current state of China’s economy?
The economy has been slow since the Covid-19 crisis, but recent data suggests it is finally turning the corner. - What measures has the government taken to address the economic slowdown?
The government has introduced measures such as reducing banks’ reserve ratio, cutting interest rates, and creating monetary-policy instruments to support the stock market. - What are the key challenges facing China’s economy in 2025?
Stabilizing the property sector, addressing local governments’ balance sheets, and facing potential US tariffs are the three key challenges. - What is the outlook for China’s GDP growth in 2025?
The government aims to achieve 5% GDP growth, but this will require overcoming the three key challenges mentioned above.