The biggest headline from last week’s ‘two sessions’ in China – the concurrent meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference – was the government’s promise that GDP growth in 2025 will remain at last year’s level of ‘around 5 per cent’.
Five per cent growth does not sound too bad. Yet China’s economic reality remains less compelling than the headline suggests, and China is unlikely to provide much increase in demand for the rest of the world’s exports.
The basic problem is that China’s policies will end up keeping its very large trade surplus intact. Meanwhile, President Trump wants to turn the US trade deficit into a surplus. There is what one might call a ‘clash of mercantilisms’: neither of these great powers wants to be the world’s consumer of last resort.
Although the confidence of Chinese consumers and businesses alike have taken a sustained knock over the past few years, there have been signs of economic revival in China these past few months.
For one, the real estate sector’s collapse is probably beyond its worst. This is partly thanks to a renewed effort in the past six months to make property more attractive by cutting mortgage rates, lowering down payment requirements, easing ownership restrictions and putting a backstop behind state-owned real-estate developers. New home sales are improving, and there are signs that property prices are stabilizing.
Another sign of recovery is that retail sales – of household appliances in particular – have risen thanks to the availability of subsidies on offer to trade in old goods for new models. As a result, sales growth has gone up to almost 4 per cent at the end of 2024 – still very slow but better than the dangerously low 2–3 per cent growth rates of last summer.
These signs of improvement are the fruit of policymakers’ growing effort last year to give the economy a boost. A notable part of this effort was Xi Jinping’s recent high-profile meeting with corporate leaders, which could be described as a warm metaphorical embrace of the private sector.
The intense activity of recent months may help explain why the stimulus measures announced at last week’s meetings were actually a bit of a disappointment.
Although the government did promise a larger budget deficit in 2025 – 4 per cent of GDP, from 3 per cent in 2024 – Beijing is still far from delivering measures that could decisively raise confidence levels among households and businesses. Compared with the State Council’s promise last month to ‘fundamentally shift our mindset and place greater emphasis on stimulating consumption’, the government’s 2025 work report published last week seemed like mere tinkering.
Two key factors limit Beijing’s desire to deliver a much-needed boost to the economy.
The first is President Trump’s unpredictability. Chinese exports entering the US now face a tariff of some 30 per cent after Trump raised it in two 10 per cent increments. Further hostility seems very likely, not least with respect to capital flows between the countries following the publication of Trump’s America First Investment Policy. However, the nature of any future hostility is very difficult to know upfront.
One might think that a US-induced negative shock to China’s economy would push Beijing to provide more rather than less stimulus, to offset the damage that Trump’s policies will inflict.
Yet China’s preference is to wait and see. As China’s finance minister Lan Fo’an made clear in a press conference last week, Beijing’s aim is to ‘preserve policy space and policy tools to cope with uncertainties coming from either domestic or external sources’.
The second factor, and a further reason why there is little stimulus on offer, is what one might call ‘balance sheet anxiety’. The central government’s debt burden is already close to 100 per cent of GDP, and so the authorities are reluctant to add to it further for fear that financial instability could create a threat to national security. And while the debt burden of China’s local governments is much lower, at around 30 per cent of GDP, their dependence on land-related revenues means that the real estate collapse has left their financial position fragile.
To put it bluntly: the central government is unwilling to provide much immediate support, while local governments are unable to – although the authorities will likely add more stimulus if sentiment really deteriorates.
In addition, the measures announced last week seem more biased towards production rather than consumption. A substantial chunk of the RMB 4.4 trillion of special bonds to be issued by local governments this year, for example, will go to repaying their arrears to companies, and to investing more in infrastructure.
Meanwhile, of the RMB 1.8 trillion of special bonds to be issued by the central government this year, only RMB 300 billion is to fund the consumer-focused trade-in programmes that have helped boost retail sales. The rest is to support equipment upgrades, high-tech manufacturing and bank recapitalization.
Pity the Chinese consumer. Despite some signs of economic revival, the last half of 2024 saw consumption expenditure account for less than 30 per cent of China’s GDP growth, the lowest it has been for well over a decade (aside from the Covid era). Things will improve only marginally in 2025.