It’s been a year since I last wrote about the Chinese economy. And it was as part of the global economy, that I was writing then. There are several reasons to turn our attention to China again: to see how the domestic Chinese economy is faring since it had gone into a serious slowdown, to see what effect Trump tariffs might have on the country, and also to check the progress on Made in China 2025 industrial policy that the country had embarked on, now that we are in 2025.
To start with, the Chinese economy has surprised on the upside again with its 2024 and Q1 2025 GDP. Coming in at 5% and 5.4% respectively, these are good growth figures on the face of it, when you consider that the country is experiencing a serious slowdown in its domestic economy. It is still the export engine especially in high-tech goods that is firing well for China’s growth in all probability, but the fact that they have managed to also report better than estimate figures for retail sales and industrial output in March 2025, unlike in the March quarter of last year, seems to suggest that the domestic economy is also on the mend. Coming in 5.9% and 7.7% respectively, with fixed asset investment also growing faster at 4.1%, these could be signs of economic recovery. Or they could be the result of a base effect, only time will tell. In fact, the latest official PMI readings for factory activity in April 2025 indicate a sharp slowdown, with the manufacturing PMI going into contraction territory over trade-related concerns.
In an article over a month ago, South China Morning Post reported that Chinese consumers were beginning to spend again, but there is still a question of whether it can be sustained. Not least of the worries are the high US tariffs on Chinese imports that have triggered a retaliatory response from Beijing. It appears that even with the Chinese consumer sentiment improving, the housing sector crisis is still a big concern. As is unemployment, especially among the youth.
The Chinese government has been pumping in trillions of yuan worth of fiscal stimulus, both to support local governments as well as to subsidise purchases of cars and household goods through trade-ins and the like, since last year. The Chinese government has also announced a 30-point plan to boost economic growth which includes growing domestic consumption. And it is said to be the biggest such effort by a Chinese government since the 1970s: wide range of measures that address wage improvements, child care, as well as the housing crisis.
The latest measures announced in May 2025 ahead of trade negotiations with the US include an interest rate cut by the PBOC, steps to help the stock market as well as assistance to businesses in China. I hope some of these measures work, because this year onward, China may not even be able to rely on exports for economic growth, as global trade is likely to slow down further as is the global economy, largely in part to the tariff increases. Therefore, China will have to double down on its domestic economy which, fortunately is a large one. The recent trade talks between the US and China held in Switzerland have led both sides to reduce tariffs to 30% and 10% respectively, but only for 90 days as of now. This might bring some relief to the Chinese and the global economy, but it also prolongs the uncertainty for businesses. Besides, it takes some of the pressure off China in terms of focusing more on the domestic economy.
My opinion based on what little I have been able to read about China’s economy, is that the government is still shying away from undertaking the tough structural reforms. The subsidizing of buying cars and household appliances in trade-in schemes has run its course, I think, and one cannot repeat these schemes too often. The Chinese government is still not reforming its hukou system, which denies urban registration – and a host of related benefits – to vast swathes of the rural population who work in cities. This would immediately increase the urban consumer base in China and open up new areas of consumption for millions of migrant workers and their families.
Then, fiscal reforms or stimulus – or both – ought to be in the form of increased wages, rationalised taxes and allowing local governments to raise some of their own tax revenue so that their dependence on the real estate sector is reduced, as I have been writing on my blog. This, and the hukou system, are to my mind, artificial constraints imposed on the domestic economy when the Chinese government would want to liberalise it, in order to enable the next phase of economic growth not just in this year or the next, but for the next decade at least.
Some of my reading seemed to also suggest that economic growth within China is uneven and varies by region. Not just variations between the bustling south-east coastal cities of China and the hinterland, but also between areas that have a strong public sector and the smaller private sector, as one of the SCMP articles quoting a person from EIU (Economist Intelligence Unit) seems to be saying. I read elsewhere that public sector wages and salaries have been seeing good growth, while the private sector hasn’t quite kept up. On the other hand, we often read that Chinese industrial workers’ wages have risen in the past decade, and this was also a reason for companies shifting production out of China, besides higher tariffs in Trump’s first term. That said, the skill levels of high-tech workers in China are said to be among the best in the world in many industries, which command the higher wages that they are paid.
The biggest conundrum that China faces in the years and decades ahead is the demographic one. It is quite startling that the working age population in China is reducing, and you could say that this is yet another of the rich-world phenomena that China is experiencing. At the same time, we read of high urban unemployment of around 5% (5.1% in 2021), and even higher unemployment among Chinese youth, figures for which range anywhere between 10% and 20%. Could it be that China’s population is ageing faster than the rate at which the workforce is adding new workers? Some people have suggested that China should introduce vocational education and training, just as India too has been attempting, in order to ensure that everyone is gainfully employed within a shorter time frame.
And when one looks at boosting domestic consumption in China, I think one ought to focus more on private final consumption, especially by households, as the share of final consumption in GDP can be much higher in China thanks to a large state sector. From World Bank’s website, I could only find a metric called households and NPISH’s consumption expenditure as percentage of GDP which might approximate as private consumption share and this was as low as 39% in 2023. I have never come across the term NPISH before, and when I checked on the same World Bank page, I found that it refers to non-profit institutions serving households, whatever that is supposed to be. What’s more, even though the World Bank charts show that consumption share of GDP has been growing since 2010 in China, the annual growth rate of private/household consumption has been slowing rather dramatically.
I am not sure if all household consumption in China is captured in the data, since the Chinese are said to make purchases and consume through the internet, perhaps more than any other country. China was one of the first countries to boast of the world’s largest mobile payments system and one hopes that all this online purchase and payment activity is captured in the economic data for the country.
There is no better time for China to try and boost private investment and create more and better paying jobs as well as grow domestic consumption. The recent tariff hikes announced by the US will force China to focus on its domestic economy. Just as many say that the tariff increases will force India to consider relaxing its import duties and trade barriers.
And as I have written before, Chinese businesses must also expand into smaller towns and cities to grow their markets and make their products more accessible to consumers. Of course, the extent and depth of the digital and online economy in China might reduce the need for some of this, but it’s not merely from the consumer purchase point of view that the expansion is required; wider presence in smaller cities and towns tends to help after-sales service access and also grow other ancillary businesses.
There is also scope to increase and improve consumption of other kinds in China, besides cars and consumer durables or apparel and packaged consumer goods. Chinese consumers are said to be frequent international travellers and high-spenders overseas; it’s time to get them and new consumers into the domestic travel market. Then, there is spending on healthcare, education, insurance, etc. that can also grow.
While the US tariffs are likely to hit China hard in certain industries such as high-tech goods, semiconductors, solar panels, EVs and batteries, etc. they are likely to be more as part of global supply chains. China has retaliated with its own tariffs on certain American imports, especially farm produce, which China can always look to import from elsewhere, as it indeed did in Trump’s first term in response to those tariff increases and the start of the trade war.
In this context, let’s look at China’s progress under its Made in China 2025 policy. According to media reports, China has met around 86% of its targets set out in its industrial policy that it announced in 2015. This SCMP article highlights the kinds of pathbreaking innovations that China has been engaged in, besides indigenizing a lot of their high-tech manufacturing and investing in R&D. The only areas where China has been short of its targets are in some information technology areas, in autonomous driving and in new materials research and production. The article is of the view that most of this has been possible despite the US tariff increases, sanctions and bans on American high-tech product exports to China; that the bans have helped fuel China’s domestic innovation engine.
Of course, the view is different depending on which side of the Great Wall of China you sit; this CNBC article cites a report issued by the European Chamber of Commerce in China which is of the view that China has missed many targets though it has “advanced rapidly to become a direct competitor to American and European manufacturing in many respects”. That last bit says quite a lot, even if it’s a grudging compliment to Chinese ingenuity.
How should we look at China’s attempts to reboot its economy then? On the positive side, plenty of huge strides made in advanced and high-technology innovation and manufacturing capacity and perhaps even world-leading in some of them. However, since most of it was directed towards external demand and towards businesses, these past few years, the time has now come to direct it inward. Where, on the negative side the Chinese economy is still struggling to boost consumer sentiment and consumption at home. Time for initiating tougher, long-term reforms and for more focus on the business-to-consumer segment. Ideas that will make Chinese consumers’ lives better and improve their quality of life.
The featured image of Guangzhou at the start of this post is from Pixabay.
Peripatetic Perch 