China’s Economy in 2025: Headwinds, Uncertainty, and the Trump Factor

In 2024, China has experienced another year of economic slowdown, with the GDP growth rate declining to 4.8 percent year-on-year in the first three quarters, down from 5.2 percent in 2023. This downturn has been primarily attributed to a marked slowdown in domestic consumption, which contributed a mere 2.4 percent to GDP, compared to 4.3 percent in the previous year. Meanwhile, investment has also shown signs of deceleration, albeit at a more moderate rate, with its contribution to GDP dipping from 1.5 percent in 2023 to 1.3 percent in the first three quarters of 2024, a figure already aided by the low baseline from previous years. Consequently, business sentiment has remained notably cautious. 

In the face of these challenges, external trade has emerged as a bright spot for the economy. However, concerns have recently started to emerge in the export sector as well. In addition, weak domestic demand, combined with sluggish growth of industrial production, has created overcapacity. This, together with the extremely weak real estate market, has exacerbated China’s strong deflationary pressures, especially in producer prices.

Slower domestic demand has also led to a decline in credit demand from both Chinese households and corporations, resulting in a balance sheet recession. This contraction in   balance sheets is adversely affecting consumption and investment. In response to this challenging environment, the government has implemented measures to stimulate borrowing by households and corporations, with monetary policy shifting towards a more expansionary stance. Purchase and mortgage rules for the real estate sector have been eased to support housing prices, though these measures have yet to produce significant results. 

To counter the sharp decline in private sector credit, the Chinese government has announced fiscal stimulus. However, what really happened is that a part of the local governments’ hidden debt, which has become a risk to financial stability following the collapse of their land revenues, needed attention, and this is where the government has decided to direct the additional fiscal resources. Specifically, the government has launched a new RMB 10 trillion debt swap, converting hidden local government debt (from financial vehicles) into official debt. This fiscal effort, equivalent to 8 percent of China’s GDP, is necessary for financial stability but insufficient to boost growth in 2025, falling short of market expectations.

Looking Ahead to 2025

Policy stimulus will be critical for economic growth in 2025. For consumption to rebound, a larger and more effective stimulus will be needed, though its implementation remains uncertain. Adding to this challenge is the increasingly uncertain external environment, which is already taking a toll on exports, as reflected in the weak data from November 2024. The prospects for 2025 are therefore far from optimistic. China’s first line of response will likely come from the People’s Bank of China (PBoC), which may further lower interest rates. While this would support domestic demand, it would also weaken the RMB, a move that would not sit well with the incoming Trump administration in the United States.

Overall, we project China’s GDP growth rate to slow down further to 4.5 percent in 2025, with domestic demand playing a critical role in offsetting the slowdown in exports. It should be noted that our projection of 4.5 percent growth already assumes some additional stimulus. Without such measures, China’s growth could come closer to 4 percent.

Key Economic and Political Risks

The above scenario is subject to some key downward risks. The most concerning one is a further escalation of the great power competition between China and the US. This risk is particularly acute given Trump’s hawkish declarations about China during his campaign and his initial cabinet announcements, including the appointment of China hawk Marco Rubio as the Secretary of State. Trump’s call for decoupling from China would not only have major negative consequences for China but also for the rest of the world. This risk could intensify if Trump decides to implement measures limiting China’s ability to bypass US tariffs by assembling its goods in third countries and re-exporting them into the US. This is particularly the case of Vietnam, but also Mexico to a lesser extent.

Another risk is the lack of additional stimulus by China, which would bring growth well below the projected 4.5 percent and could trigger a downward spiral in confidence with large capital outflows and a potentially very weak RMB. The latter scenario could get even more complicated if China were unable to control the current risks to financial stability posed by underfunded local governments. In fact, local governments have been leveraged heavily for years through local government financial vehicles (LGFVs), which are now increasingly unable to serve the debt. Given Chinese banks’ significant exposure to LGFVs, their asset quality – and thereby their solvency – is at risk. Beyond these economic risks, geopolitical tensions in the South China Sea and the Taiwan Strait could create further challenges.

The Trump Factor

On a more positive note, recent signals coming from the Trump administration seem to contradict the very hawkish stance on China that Trump maintained during his campaign. For instance, he has announced 25 percent tariffs on Mexico and Canada (currently shielded by a free trade agreement with the US) but only 10 percent additional tariffs on China. This is much lower than the anticipated 60 percent increase based on Trump’s campaign rhetoric.

In addition, Trump’s recent nomination of David Perdue as US ambassador to China signals a preference for engagement over decoupling. Finally, Trump has reportedly invited President Xi to his inauguration, further hinting at a potential for renewed trade deal negotiations between the two countries, which could follow the example of the Phase I deal from December 2019. This would be good news for markets, though potentially not for Europe, especially if these negotiations follow the spirit of the Phase I deal in which the US managed to secure preferential access to China’s market, including through an agreed-upon minimum value of additional exports (USD 200 billion annually) and preferential access to China’s banking sector. 

All in all, China’s economic outlook for 2025 appears underwhelming, much like in 2024 and 2023, but with an important difference: the uncertainty surrounding Trump’s approach to China is at an all-time high. Based on Trump’s campaign rhetoric, the risks appear skewed to the downside. However, Trump’s actions following the November elections hint at the possibility of a different path – that of a negotiated economic deal between the US and China. Such a deal would not mitigate China’s structural deceleration but could ease the US-China economic tensions, at least temporarily.