Last year, President Xi Jinping addressed China’s economic woes in his New Year’s Eve speech. He promised to “consolidate and strengthen the momentum of the economic recovery.” As the year draws to a close, little seems to have changed other than the date. While China’s state media boasts of its economic progress, global reporting suggests the reality in the world’s second-largest economy is less rosy.
Central Economic Work Council
Every December, China’s leaders gather at the Central Economic Work Conference to review the past year and plan for the coming year. This year’s discussions reflected both the challenges of 2024 and the uncertainties ahead.
Consumer behavior tells an alarming story. Retail sales rose just 3% in November from a year earlier, lower than expected even before adjusting for inflation. Meanwhile, consumer prices rose only 0.2%, indicating that households remain cautious with their spending. This cautious approach comes as the economic impact of the 2022 coronavirus lockdown continues to weigh on confidence.
The challenges for 2025 are increasing. According to The Economist, key growth drivers such as exports and manufacturing investment face threats, particularly from the United States. President-elect Donald Trump has proposed imposing tariffs of more than 60% on Chinese goods and an additional 10% fine if China fails to address its fentanyl exports. Analysts at Citigroup warn that these tariffs could reduce China’s growth rate by 2.4 percentage points unless the government takes strong measures to counter the impact.
Although the Chinese government is hopeful of resilience, there are still many hurdles ahead and bold action is needed to stabilize the economy.
the power of stimulation weakens
China’s economic strength in the past has often been driven by aggressive government stimulus, especially during crises such as the 2008 global financial crisis. At the time, state-owned banks and companies were driving demand, supported by a booming real estate market. But today the situation is very different. The real estate market is struggling and cautious banks are holding off on reducing the effectiveness of new stimulus packages.
For example, in May the government launched a 300 billion yuan ($41 billion) refinancing program to turn unsold properties into affordable housing. However, by late November, the utilization rate of this fund remained less than 15%, according to Huatai Securities.
According to The Economist, the root of the problem lies in past overexpansion. After 2008, China faced soaring debt and an oversupply of unsold apartments. To address this, Xi’s government has introduced policies such as “supply-side structural reforms” and the “three red lines” to limit developer borrowing. Although these measures were aimed at stabilizing the economy, they have led to the bankruptcy of major developers from 2021 onwards, further delaying the recovery of the real estate market.
Realigning priorities
As slow growth poses challenges to the economy, Chinese leaders are shifting from a supply-driven approach to demand stimulation. This change was evident in the Central Economic Work Conference, where “strong promotion of consumption” became a priority and the long-standing focus on industrial upgrading was set aside.
According to Absolute Strategy Research’s Adam Wolf, the Ministry of Finance has announced that local governments can issue bonds to manage 10 trillion yuan of hidden debt, potentially freeing up 1.2 trillion yuan in 2025. There is sex.
The housing market is also showing early signs of recovery. New home real estate sales rose year-on-year in November, the first such increase in three years, excluding a temporary increase after coronavirus restrictions were eased in early 2023. These measures suggest progress, but sustained efforts are key.
Expanding the consumer toolkit
China is turning to creative strategies to boost consumer spending. Cities such as Shanghai have introduced electronic shopping coupons that offer discounts on meals, entertainment and entertainment if spending thresholds are exceeded. The initiative will run alongside the government’s trade-in program, which encourages households to upgrade their appliances and cars. As a result, household goods retail sales surged more than 22% in November, despite weak overall retail performance.
Other measures include expanding health insurance subsidies and raising pensions to increase disposable income and reduce household savings. These efforts could increase China’s budget deficit by nearly 2% of GDP by 2025, according to Goldman Sachs, cited by The Economist.
Structural reform and excess debt
At the national level, China’s debt situation appears to be manageable, with a debt-to-GDP ratio of around 68%, far lower than Japan’s 250% and the United States’ 120%. But local governments face an even harsher reality. Declining tax revenues, a depressed real estate market, and pandemic-related spending have left many in unsustainable debt. Some local governments are struggling to pay salaries.
To address these challenges, the Politburo moved away from the “cautious” stance it had maintained for more than a decade and adopted a “moderately accommodative” monetary policy. While Xi’s vision of an innovative, high-quality economy remains a long-term goal, the government’s immediate focus is on growing demand and stabilizing the economy.
External pressures and the global situation
China’s economic problems are further exacerbated by global problems. President-elect Trump’s aggressive trade policies highlight the widening rift between China and the West.
Despite these challenges, there are reasons for hope. China’s success in 2025 will depend on a balance between internal changes and external pressures. While recent efforts to boost spending are off to a good start, major challenges still loom, including local government debt and cautious banks’ lending.
These words may sound familiar as President Xi prepares for his New Year’s Eve speech. But behind the scenes is a country at a crossroads, working to solve its immediate problems while aiming for a bright high-tech future. The success of these efforts will determine not only China’s future but also its place in a divided world.
