Three big problems for China’s economy in 2025

China’s GDP growth slowed down in the first three quarters of this year, from 5.3% to 4.7% to 4.6%, respectively. To achieve the yearly target of 5%, the country aggressively launched many monetary and fiscal policies to support growth by the end of the third quarter.

Thanks to that, in recent months, retail sales, purchasing managers index and real estate market have gradually improved. Mr. Huang Yiping, Principal of the National School of Development, Professor of Peking University, member of the Monetary Policy Committee of the People’s Bank of China, forecasts that the world’s second largest economy will still achieve its growth target. growth in 2024 with this momentum.

At the Central Economic Work Conference (CEWC) on December 11-12, Beijing outlined the goal of “maintaining stable economic growth”, increasing the fiscal deficit ratio and issuing more bonds, but did not mention specific numbers.

Meanwhile, Moody’s Ratings recently raised its 2025 China growth forecast from 4% to 4.2%, thanks to expectations that credit conditions will stabilize and Beijing’s stimulus efforts since September More optimistically, Goldman Sachs Research thinks it can reach 4.5%. In contrast, UBS cautiously gave the figure 4%.

However, the outlook for next year is still unclear, according to Mr. Huang Yiping and many international experts. Accordingly, if Beijing wants to achieve GDP growth of 5%, it will have to overcome three main challenges, including: stabilizing the real estate market, resolving local government debt and dealing with the risk of the President. US elected Donald Trump increased taxes on imported goods “made in China”.

First is the real estate market, The sector contributes about 20% of GDP and accounts for 70% of household assets. This is “the biggest drag on the Chinese economy in 2024”, according to ING financial group (Netherlands). Therefore, continuing to remove difficulties for real estate is to untie the knot for growth next year.

According to ING data, real estate developers’ defaults have slowed down, with more than 420 million square meters of floor space completed in the first 10 months of the year. Inventories peaked in February 2024 and began to gradually decline. However, house prices still go down.

A series of support policies this year but buyers are still cautious. In the first 10 months, house prices in the secondary market decreased by 7.5% and in the primary market by 5.5%. Compared to the 2021 peak, prices are currently down 15.8% and 9.4%, respectively.

“Stabilizing real estate prices is still an important task to maintain household confidence. It is difficult to expect people to spend confidently when their largest asset is losing value every month,” analyzed ING stated.

At the Central Economic Work Conference held in early December, officials decided that continued efforts should be made to reverse the real estate recession and properly control the supply of urban land for housing development. .

This week, the Ministry of Housing and Urban and Rural Development held a conference to propose a plan to promote new development models for the real estate industry, while accelerating the renovation of old housing projects in rural areas. Chinese city.

Accordingly, this agency will strictly control the construction of additional commercial housing to optimize current supply. Meanwhile, increase social housing development to address the housing needs of new residents, young people and low-income families. In addition, the government will continue to reform the real estate transaction system to promote the sale of completed houses and increase supervision of project house sales.

UBS believes that real estate support measures since the end of September may create favorable conditions for stabilizing prices and sales but it will still take time for the effect to be clear. According to the Swiss bank’s forecast, the decline in sales and number of projects will narrow to 5-10% and 10-15% respectively in 2025, before stabilizing by 2026, with the largest cities recovering. dress first.

The second challenge is the balance sheet of local governments. In 2024, many localities are stuck in a dilemma with high debt and falling revenue, causing challenges to efforts to boost the economy. If this is not resolved soon, this will continue to be a major obstacle for next year.

According to China’s Ministry of Finance, by the end of 2023, only “hidden debt”, that is, off-budget loans through local government financial platforms, government investment funds and other channels other has reached 14,300 billion yuan (more than 2,000 billion USD).

This year, some places are short of money so they have to cut spending – such as reducing officials’ salaries and finding ways to increase revenue – such as collecting corporate taxes. “The basic problem is that expenditure is exceeding revenue, because local budgets are no longer supported by land sales and investment vehicles of local governments,” Professor Huang Yiping said.

In November, China’s Ministry of Finance announced the “most important support package launched in recent years” with the goal of resolving “hidden debt” for local governments by 2028. The support package includes raising the debt ceiling of local governments to 6,000 billion yuan (more than 830 billion USD) in the next 3 years.

In addition, local governments are allowed to use 800 billion yuan per year through the issuance of specialized bonds for five consecutive years to provide debt relief as an alternative to “hidden debt”. Officials estimate that converting off-budget debt to budget will help local governments save 600 billion yuan in interest within five years.

However, according to analysts, action is still not enough. Xing Zhaopeng, senior China strategy expert, ANZ (Shanghai), said that it is still far from solving the debt risks of local governments because the figure of 6,000 billion yuan is encouraging but still too much. small.

Sharing the same opinion, Huang Xuefeng, Research Director at Shanghai Anfang Private Fund (Shanghai), said that considering the fiscal deficit due to the economic recession and reduced revenue from land sales, this number is not too large. “This money is used to replace ‘hidden debt’, which means it does not create new cash flows, so the impact of supporting GDP growth is not direct,” he pointed out.

Finance Minister Lan Fo’an said that next year the government will actively increase the issuance of special purpose bonds by local governments and transfer more budget revenues from the central government to the provinces.

China still has a lot of space to choose this solution because its ability to accept budget deficits is still high. By the end of 2023, this country’s public debt will be 85,000 billion yuan (11,900 billion USD), 67.5% of GDP. Meanwhile, the average rates of the G20 and G7 were 118.2% and 123.4%, respectively, according to the International Monetary Fund.

However, experts believe that the fundamental thing to do is to accelerate fiscal decentralization reform. “More fundamentally, China needs to reshape the balance of financial responsibility between levels of government,” said Professor Huang Yiping.

The third biggest problem is the risk of the US increasing tariffs on imported goods. President-elect Donald Trump, who has vowed to impose a 60% tax on all imports from China in his first year in office. Exports to the US account for 3% of China’s GDP, so the new tariffs will have a significant impact on growth.

UBS offers a scenario that assumes that tariffs will increase by 60% with about three-quarters of goods imported from China to the US implemented in stages from the third quarter of 2025 to the second quarter of 2026. In response, China retaliated with limited retaliation against targeted US products.

As a result, corporate capital spending could weaken significantly as early as 2025 and the decline in exports reach its most severe level in 2026. “Even considering the likely changes in trilateral trade ( China, the US, the remaining economies) and supply chain changes, we estimate the negative impact on GDP growth could exceed 150 basis points,” the UBS report stated.

Goldman Sachs Research noted strong exports were the lone bright spot in the Chinese economy this year, contributing 70% of growth. Although the country’s exporters may continue to gain market share in emerging market countries amid rising US tariffs, the growth rate of total export turnover is still likely to decline sharply. Therefore, the growth contribution of exports may decrease significantly by 2025.

Risks to exports to the US mean China needs to rely on domestic sources of growth, where consumers are hit by falling real estate prices. Last week, Beijing announced plans to expand exchange programs for consumer goods and industrial equipment to more products and sectors to stimulate demand.

There has been much debate in China about whether the economy needs structural reforms or more macroeconomic stimulus. The truth is that the economy needs both, according to Huang Yiping, with a drastic stimulus package, strong fiscal policy must be implemented first. Then, shift the focus to structural reforms, focusing on boosting consumer, investor and business confidence.

Hui Shan, Chief China Economist at Goldman Sachs, said the immediate choice for Beijing is simple: either provide a large dose of policy compensation or accept significantly lower real GDP growth. “We hope they will choose the first option,” he said.

According to sources ReutersBeijing recently finalized its plan to issue 3,000 billion yuan (411 billion USD) of special treasury bonds by 2025, a sharp increase from 1,000 yuan this year and the highest level ever. to strengthen financial stimulus to recover the economy.

The proceeds will be used to promote consumption through subsidy programs, upgrade businesses’ equipment and fund investments in advanced fields that promote innovation, along with many other initiatives.

According to Shan, China’s economy faced significant growth headwinds this year and authorities finally began easing more aggressively at the end of September.

“How Chinese policymakers will fight the headwind to stabilize domestic consumption and the real estate market, while controlling new US-China trade tensions. That will be the topic covered.” boss of 2025,” he predicted.