The Chinese economy stumbled in 2024, laying to rest any remaining hopes of a durable strong recovery.
Exports will face further headwinds from U.S. tariffs in 2025. China’s fragile domestic economy has made it more vulnerable to protectionism. Higher tariffs on all Chinese imports could create further cracks in China’s decades-old manufacturing and export growth model. Additional tariffs on rerouted and direct imports of Chinese goods along with further technology restrictions are in store.
China is facing a long list of troubles.
China would like to avoid a further escalation in the ongoing trade war, and they are hoping that extreme proposals give way to negotiated settlements. But given the large trade imbalance and strategic competition with the U.S., new frictions seem unavoidable. Beijing could retaliate by targeting American agricultural products and restricting shipments of raw materials like rare earth metals.
To offset tarriffs’ costs, Beijing may resort to more forceful policy responses such as weakening the renminbi and increasing export rebates. However, currency depreciation of unprecedented magnitude will be needed to restore competitiveness of Chinese goods, under a worst-case tariff scenario. Weak domestic demand, industrial overcapacity and deflationary pressures will likely force policymakers to announce more direct stimulus. Monetary policy will continue to support fiscal policy as necessary.
Local government debt risks have eased following the announcement of a swap program to restructure debts, but the boost to growth will likely be negligible. China will have to make significant advancements in technology to boost productivity, if it wants to avoid the Japanification of the economy as demography becomes more unfavorable.
Deflationary forces are taking hold, with consumer price inflation hovering just above zero and producer prices deep in negative territory. Cautious policy efforts to boost growth have yielded only limited results.
A large, unprecedented demand-side stimulus and a favorable external backdrop will be required to fix this ailing economy. We expect the annual growth rate to slow to below 4%. The Chinese economy stands at a juncture where there are more ways things can go wrong than right.
Click on the chart to zoom in and explore the data.
