Last year, China’s economic system growth exceeded preliminary expectations.
The main factors of the mentioned result are government measures to stimulate economic activity, which were unveiled in the second half of 2024 and actually became overdue but generated a positive effect, and a kind of boom in the export operations of the Asian country. At the same time, as noted by the media, China’s gross domestic product (GDP), having demonstrated a growth rate that exceeded expectations, faces a serious risk. In this case, it is implied that the head of the People’s Republic of China, Xi Jinping, begins to weaken stimulus measures when the likely moment of tariff increases on goods imported from the Asian country to the United States is approaching. US President-elect Donald Trump, whose inauguration will take place next week, has repeatedly stated his intention to do so. For China, the increase in tariffs will be a sensitive factor of impact. Recently, exports have been the main driving force behind the growth of the Asian country’s economy. For this reason, the tightening of Washington’s tariff policy is most likely to weaken the upward momentum of China’s GDP. Beijing will probably be able to take measures that will reduce the severity of the impact of the relevant factor, but it will not be possible to completely avoid negative consequences in this case.
In the fourth quarter of 2024, China’s GDP grew by 5.4% year-on-year. These increase rates of the mentioned indicator are the most intense in the last six quarters. Most analysts expected the Asian country’s GDP growth to be more moderate in the fourth quarter of 2024.
Over the past year, the Chinese economy, which is the second-largest in the world, rose by 5%. It is worth noting that Beijing’s corresponding target for 2024 was about 5%.
Increased measures to stimulate economic activity in the fourth quarter of last year did not contribute to rapid increased domestic consumption, which is still below the level observed before the coronavirus pandemic.
Also, in 2024, the volume of investment in real estate in China dropped to a record. Besides, the deflation has persisted in the Asian country for the second year in a row.
Once adjusted for falling prices, China’s nominal GDP grew by 4.2% in 2024. These growth rates are the slowest since the Asian country’s economy opened up in the late 1970s. It is worth clarifying that in this case, in the context of a chronological comparison, the slump during the coronavirus pandemic is not taken into account.
Societe Generale SA economists Wei Yao and Michelle Lam wrote in a note that the Chinese economic recovery remains fragile. In their opinion, the policymakers of the Asian country need to strengthen fiscal boost in 2025 to ensure stable growth.
After the data on China’s GDP increase was published, the yuan strengthened by 0.1% against the dollar in both the onshore and offshore markets. The benchmark CSI 300 index of an Asian country stock closed up 0.3%.
Fiscal policy is expected to be a central element in Beijing’s stimulus measures this year. Also, according to media reports, the Chinese government is likely to announce its budget deficit and bond issuance plans in March. The corresponding figures will be evidence of how much Beijing intends to spend to bolster economic growth in the context of a possible second trade war with Washington.
Optimistic data on the dynamic of China’s GDP in 2024 may be perceived by the authorities of the Asian country as a kind of reason for complacency.
Morgan Stanley economists including Robin Xing wrote in a note that better data likely reduced Beijing’s sense of urgency and policy may continue to undershoot on the housing and social welfare front. According to their estimates, about 60% of the rebound of the annual growth of the Chinese economy is due to measures aimed at boosting consumption and investment in the manufacturing sector, while the rest came from advanced shipments. At the same time, they warned that the improvement may be temporary. According to their forecasts, the upward dynamic of the Chinese economy will begin to ease in the second quarter of the current year. They cite the expected slowdown in exports and housing weakness drags on as the reasons for the implementation of the corresponding scenario.
Currently, fiscal policy is particularly important for China’s GDP prospects. In this context, it is worth noting that in an Asian country, the scope of loosening monetary policy is limited by the growing pressure on the yuan to depreciate and capital outflow concerns.
Last month, the media reported on the Chinese government’s intentions to increase the budget deficit to 4% of GDP and triple sales of special treasury bonds.
Beijing is set to announce its economic growth target for 2025 at the annual parliamentary session in March. The media reported that it is highly likely that the mentioned indicator will be the same as in 2024. The corresponding assumption is based on the already announced goals of the provinces of China.
Achieving 5% GDP growth in the current year may be a more difficult task for the Asian country compared to the efforts that were needed in 2024. In the relevant context, it is worth mentioning Donald Trump’s intention to raise tariffs on goods imported from China to 60%. This is a clear threat to exports, which contributed about a quarter of the Asian country’s economic growth last year.
Jacqueline Rong, chief China economist at BNP Paribas SA, said that in 2024, the biggest bright spot in the Chinese economy was external shipments of products, which turned out to be especially strong. According to the expert, this means that US tariffs will be the biggest problem for the Asian country’s economic system in the current year.
Donald Trump’s tariff threat caused global businesses to frontload shipments in 2024. This factor contributed to the growth of the Chinese economy last year. At the same time, in the coming months, the corresponding impulse may completely lose its power, ceasing to be a source of any impact. Tougher US tariffs and likely similar measures from the European Union and other United States allies will significantly reduce the competitiveness of Chinese exports.
The Chinese government has signaled that it has enough opportunities to stimulate the economy, but at the same time, the effectiveness of public spending has waned in recent years. In the Asian country, officials have struggled to find enough appropriate infrastructure projects to build. At the same time, private investment volumes were on a downward trajectory. Further push production may worsen the factories’ overcapacity problem and complaints from trading partners that China is flooding global markets with cheap goods.
Beijing has repeatedly promised to make consumption growth a top priority in 2025, under pressure from both a darkening export outlook and declining benefits of the investment playbook. They intend to expand the subsidy program for companies and consumers to upgrade appliances and equipment after this initiative helped accelerate retail sales growth in the last months of 2024. Pensions and subsidies for medical insurance for certain groups will also go up in China. Potentially, this factor can encourage households to spend rather than save.
Last year, the Chinese government earmarked 300 billion yuan ($40.9 billion) raised from the sale of special government bonds to finance equipment upgrades and a trade-in consumer goods program. Helen Qiao, chief economist for Greater China at Bank of America, said that the corresponding figure could double in the current year.
Lu Ting, chief China economist of Nomura Holdings Inc., said about concerns that Beijing might not ramp up its efforts enough to do the hard work after some short-term positive results were recorded. The expert also noted that despite the sanguine GDP data published this week, it is not the time for China to rest on its laurels.
As we have reported earlier, China’s Central Bank Makes It Easier for Companies to Borrow More Foreign Debt.
