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Written by Valerie Hernandez, International Banker
On January 17, China announced a year-on-year increase in its gross domestic product (GDP) of 5 percent for 2024. While this growth was slightly lower than the 5.2 percent seen in 2023, it aligned with Beijing’s target of approximately 5-percent growth. Additionally, Chinese officials pointed to the state’s stimulus package as a significant factor in reaching this target, with notable improvements observed in the fourth quarter. However, challenges lie ahead for China in 2025, especially due to the US tariff regimes likely to impact Chinese exports, potentially moderating the effects of these stimulus measures on this year’s economic growth.
The report from the National Bureau of Statistics of China (NBS) stated, “The national economy was generally stable with steady progress, and new achievements were made in high-quality development. Particularly, timely implementation of a package of incremental policies effectively boosted public confidence, leading to a remarkable economic recovery.” Key factors in this rebound included manufacturing, with industrial output increasing by 5.8 percent year-on-year; export growth at 7.2 percent; and retail sales of consumer goods rising annually by 3.5 percent.
The stimulus initiatives launched by Beijing in late September played a pivotal role in the economic recovery observed in the fourth quarter. These measures were branded by the government as “extraordinary counter-cyclical policy tools” intended to strengthen the economy. On September 24, China initiated aggressive monetary policies by implementing various cuts: a 0.2 percentage point reduction in the seven-day policy rate, a 0.5 percent cut in the reserve requirement ratio (RRR)—the proportion of deposits that commercial banks must retain in cash—and relaxed mortgage regulations, including a 0.5 percentage point reduction in mortgage rates for existing home loans and a decrease in the minimum down-payment ratio for second homes from 25 percent to 15 percent, which is on par with first homes.
On that same day, the People’s Bank of China (PBoC) introduced a 500-billion-yuan swap facility to enhance funding access for funds, brokers, and insurers for purchasing swaps, as well as 300 billion yuan in loans to commercial banks to aid in financing entities seeking share purchases and buybacks. These initiatives aimed to stimulate capital-market activities within China.
Two days later, the Communist Party of China (CPC) gathered for a meeting where President Xi Jinping urged party officials to strengthen key sectors of the economy, including real estate, consumption, and capital markets through “necessary fiscal spending.” Subsequently, the National Development and Reform Commission (NDRC), the State Council’s main economic-planning agency, announced on October 8 the allocation of 100 billion yuan from its 2025 fiscal budget to finance essential investment projects over the year. Four days later, further fiscal-loosening measures were introduced when the Ministry of Finance unveiled a one-off initiative to lift local governments’ debt ceilings for swapping out their “hidden debts” and expand the use of special-purpose local bonds.
Towards the end of October, the list of housing projects eligible for financing was expanded, with bank lending for these developments increased to four trillion yuan by year-end. Ni Hong, the minister of housing and urban-rural development, announced that one million “urban villages” would be incorporated into new city-development plans. Furthermore, four days later, the PBoC reduced its five-year loan prime rate—which serves as a benchmark for mortgage rates—from 3.85 percent to 3.6 percent, along with a 0.25 percent cut in the one-year loan prime rate—a benchmark for corporate loans—bringing it down to 3.1 percent.
On November 8, a major debt-relief package amounting to 10 trillion yuan was unveiled, aimed at alleviating local government financing pressures and stabilizing growth. A month later, the PBoC revised its monetary policy stance for the first time in 14 years from “prudent” to “appropriately loose” (one of five official stances: loose, appropriately loose, prudent, appropriately tight, and tight). “A more proactive fiscal policy and an appropriately loose monetary policy should be pursued, enriching and refining the policy toolkit, and reinforcing extraordinary counter-cyclical adjustments,” a CPC readout emphasized, noting the necessity to stabilize the housing and stock markets.
On December 17, Reuters reported that the government’s budget-deficit target for 2025 would be set at 4 percent of GDP, an increase from the 2024 target of 3 percent, alongside a 5 percent economic growth target. The additional 1 percent of GDP in net spending has been estimated to amount to roughly 1.3 trillion yuan. Additionally, reports indicated plans to distribute extra stimulus measures through issuing off-budget special bonds. Exactly a week later, authorities agreed to issue special treasury bonds valued at three trillion yuan in 2025, marking the highest annual amount on record. In January, Beijing executed widespread wage increases for millions of government employees, estimated to total between US$12 billion and US$20 billion.
Thus far, this all-encompassing package of stimulus measures appears to be effective in supporting economic growth, with China achieving its 5-percent GDP growth target last year. According to Zichun Huang of Capital Economics, the economy managed to regain some momentum in the final quarter thanks to Beijing’s backing. “Increased fiscal spending should continue to act as a near-term support for activity,” Huang observed recently.
However, significant risks loom for China in 2025, particularly with expectations of an impending wave of trade tariffs from the United States affecting Chinese exports. President Donald Trump has already imposed a 10 percent additional tariff on imports from China, coupled with threats of 25 percent tariffs on imports from Mexico and Canada, raising the effective rate to 20 percent. While this 10 percent tariff is considerably lower than the 60 percent Trump frequently referenced during his election campaign, many anticipate further punitive trade measures as he intensifies US trade conflicts with various countries, including China.
Indeed, Trump’s continued tough rhetoric around implementing protectionist measures could have a substantial impact on China’s exports. “We expect growth to decelerate throughout 2025, as Trump is likely to follow through with his tariff threats soon, alongside persistent structural imbalances continuing to weigh on the economy,” Huang added.
Goldman Sachs Research forecasts a slowdown in China’s growth this year as the effects of tariffs counterbalance the government’s stimulus initiatives. In a report dated December 4, the US bank projected a decline in real GDP growth in 2025 to 4.5 percent, assuming a 20 percentage point rise in the effective tariff rate imposed by the US on Chinese goods, which would decrease China’s real GDP by 0.7 percentage points. Although a 10 percent increase in tariffs has already been instituted, additional levies could be implemented in the future, although Goldman’s forecast also anticipates that Chinese lawmakers will introduce more stimulus to mitigate the impacts of tariffs.
According to Banco Bilbao Vizcaya Argentaria (BBVA), efforts to resolve ongoing trade disputes with the US should not impede the pace of domestic stimulus enforcement. “Effectively, the largest obstacles to growth largely derive from China’s domestic vulnerabilities, including a sluggish property market, local government debt burdens, and weak market confidence,” remarked the Spanish lender in a report published on February 5. “A sluggish implementation of necessary stimulus could only worsen the economic situation and market sentiments. Furthermore, a robust domestic economy will fortify China’s negotiating power in discussions with the US.”
Goldman’s chief economist for China, Hui Shan, echoed these sentiments. “Policymakers in China face a clear choice: implement significant policy offsets or accept reduced headline real GDP growth. We anticipate they will opt for the former,” Shan stated in early December. “The Chinese economy encountered considerable growth challenges in 2024, prompting policymakers to initiate more forceful easing in late September. How Chinese authorities respond to stabilize domestic consumption and the property sector while managing renewed US-China trade conflicts will be the primary focus in 2025.”
In fact, the outlook for consumption is likely to play a crucial role in shaping China’s overall economic prospects this year. A prolonged decline in the property sector has heavily impacted consumer sentiment, significantly hampering China’s economic growth. The third quarter indicated that household consumption represented only 29 percent of China’s headline GDP, a stark decrease from the 47 percent in the second quarter and 59 percent before the pandemic hit.
Therefore, it is unsurprising that enhancing consumption and boosting domestic demand are the main priorities for policymakers in 2025. “With the combined efforts of stock policies and an array of incremental policies, the momentum of economic recovery is gaining strength, consumer demand is recovering faster, and there are more favorable factors for a moderate rebound in prices,” according to Fu Linghui, spokesperson for the National Bureau of Statistics.
Moreover, this emphasis on consumption may already be yielding results. A UBS report published on January 20 predicted that China’s consumer sector is nearing a “tipping point” as the stimulus measures enacted by Beijing encourage consumers to diminish savings and increase spending. The report indicated that household excess savings grew at a slower rate in 2024 and even dipped in the third quarter, while social retail sales rose 3 to 4 percent year-on-year. The Swiss bank primarily attributed these trends to supportive government policies and the diminishing “scarring effect” of the COVID pandemic.
According to UBS, domestic brands in China are set to be the primary beneficiaries of this consumer recovery. “With enhancements in product quality and convenience of channels, consumers may no longer view domestic brands and/or private labels as ‘cheap substitutes’ for foreign products, but increasingly choose domestic brands and/or private labels with a pragmatic mindset,” UBS stated. Nonetheless, the report acknowledged that investor expectations for a recovery in consumption remain muted due to the threat posed by heightened US tariffs and anticipated underperformance in the property sector. Nevertheless, UBS projects that real consumption growth in China will hover around 3.8 percent annually until 2026.
Goldman Sachs anticipates household consumption growth to stay at 5 percent in 2025. “The weakening in domestic demand has finally activated the ‘policy put,’ with the ongoing easing highlighting local government debt resolution, household consumption, and equity market performance,” economist Hui Shan noted.
However, skepticism remains regarding China’s touted recovery. “These growth figures stretch the limits of believability and will do little to foster confidence or change the perception of an economy that appears to be struggling,” remarked Eswar Prasad, a professor of trade policy and economics at Cornell University and a former head of the International Monetary Fund’s (IMF’s) China division, in a recent comment to the Wall Street Journal. “A more accurate assessment of the economy can be derived from volatile stock markets, ongoing turmoil in the property sector, a depreciating currency, and capital outflows. These indicators hardly align with an economy meeting growth targets precisely.”
Furthermore, BlackRock has indicated that China’s fiscal stimulus “is not yet sufficient to tackle the obstacles to economic growth.” The asset-management company’s Investment Institute stated in its weekly report on January 14 that it remains “cautious long-term, given China’s structural challenges.”
Pierre‑Olivier Gourinchas, chief economist at the IMF, has echoed similar sentiments. “The PBoC’s measures announced at the end of last month, while heading in the right direction, are inadequate for significantly boosting growth,” Gourinchas remarked. The IMF has predicted a slowdown in China’s growth to 4.6 percent in 2025 and 4.5 percent by 2026. “The Chinese economy needs to pivot towards a more domestically driven growth engine,” Gourinchas told reporters on January 18, stressing the need for more growth levers beyond external trade.
With the likelihood of more tariffs from the US in the months ahead, China’s growth forecasts will remain somewhat restricted, yet at a significantly higher rate compared to most global economies. According to Fitch Ratings, the recent 10 percent increase was just a “starting point” from Trump, with more tariffs on the horizon. “We view recent developments as consistent with our baseline assumptions regarding US tariffs on China, maintaining our prediction that China’s economy will grow at 4.3 percent in 2025,” the credit-rating agency reported on February 7. “We still foresee a shift towards an expansionary fiscal policy in response to both external and domestic growth headwinds, along with domestic deflationary pressures.”
When it comes to inflation, it is expected to stay subdued this year and beyond, posing minimal material risk to China’s macroeconomic stability, despite the extensive monetary and fiscal measures implemented via stimulus. Goldman Sachs Research projects China’s Consumer Price Index (CPI) and Producer Price Index (PPI) in 2025 at 0.8 percent and 0 percent, respectively, in contrast to Bloomberg’s consensus estimates of 1.2 percent and 0.4 percent. “Several structural factors are exerting downward pressure on inflation, including the prolonged downturn in housing and ongoing industrial overcapacity,” Shan pointed out. “Restoring consumer confidence and enhancing labor markets and wage growth are likely to require time.”
