China’s Q4 GDP grew by 5.4% in the final quarter of 2024 which was higher than the 5% growth that economists were expecting. The country’s GDP grew by 5% last year which is in line with the “around 5%” growth that it was targeting.
Notably, while China’s GDP grew at an annualized pace of over 5% in Q1, the growth fell below that threshold in the next two quarters. Amid slowing growth, the country started unleashing a flurry of stimulus measures beginning in September.
China’s economic stimulus
China started with easing monetary policy and in late September, and its central bank lowered the 7-day reverse repurchase rate by 20 basis points to 1.5%. It also lowered the reserve requirement ratio for banks by 50 basis points which made more funds available for lending.
The country followed up with more monetary easing and also eased home-buying restrictions to ease pressure on the ailing sector, which was once a key pillar of the world’s second-biggest economy.
The world’s second-biggest economy also vowed more fiscal measures despite concerns over its already high debt pile with the finance minister stressing that China has more space to increase its fiscal deficit.
China announced yet another stimulus after the parliament meeting concluded in November. The package, which is worth 10 trillion yuan (around $1.4 trillion) and is spread across five years, is meant to tackle the burning issue of local government debt and would allow them to borrow more to spur growth.
Meanwhile, China’s massive stimulus failed to win over many analysts who stress the need for more measures as the communist country battles a structural slowdown which is being made worse by demographic factors.
The country has for long been trying to steer its economy from one that’s led by investment and exports to domestic consumption-driven, but the pivot hasn’t been as successful amid the tepid consumption growth in the world’s second-biggest economy.
Analysts on China’s GDP data
Commenting on China’s GDP data, Zhiwei Zhang, president and chief economist, at Pinpoint Asset Management said, “The shift of policy stance in September last year helped the economy to stabilize in Q4, but it requires large and persistent policy stimulus to boost economic momentum and sustain the recovery.”
According to Bruce Pang, distinguished senior research fellow at the National Institution for Finance and Development, “They (Chinese authorities) are betting on a substantial infusion of policy stimulus and reforms to turbo boost the country’s economy in 2025, invigorating domestic demand and warding off disinflationary loom.”
Notably, while most other leading economies are battling still-high inflation, China is facing prospects of deflation. The country’s retail inflation is barely positive while wholesale prices have now fallen for 27 consecutive months.
Trump has vowed more tariffs on Chinese goods
US-China relations which are anyways at the lowest level in decades might deteriorate further if President-elect Donald Trump goes ahead with the tariffs as he has threatened. The tariffs could hit China’s exports to the US. Analysts believe that China’s yuan which has anyways been depreciating against the US dollar, could slump even further if Trump goes ahead with the 60% tariffs that he has talked about.
Notably, in Trump’s first tenure, the US Treasury Department designated China as an official currency manipulator. For long, the US and other countries have alleged that China’s currency is artificially low which makes its exports competitive in global markets.
Goldman Sachs Expects More Stimulus in China
Goldman Sachs meanwhile expects more stimulus from China in 2025 which it believes would help offset any negative impact from Trump’s tariffs. The firm expects China’s GDP to rise by 4.5% in 2025 based on its assumption of a 20-percentage point increase in US tariffs.
“The choice in front of Chinese policymakers is simple: either to provide a large dose of policy offset or to accept a notably lower headline real GDP growth,” said Goldman Sachs’ Chief China Economist Hui Shan. The note added, “We expect them to choose the former.”
According to Shan, “The Chinese economy faced significant growth headwinds in 2024, and policymakers finally started more forceful easing in late September.” She added, “How Chinese policymakers will lean against the wind to stabilize domestic consumption and the property market, and to manage renewed US-China trade tensions, will be the overarching theme of 2025.”
The Chinese economy is witnessing a structural slowdown
All said, there looks no easy remedy for the structural slowdown in the Chinese economy. China’s industrial sector has been plagued by a massive overcapacity and with many countries clamping down on imports from China, Chinese companies are struggling to export their overcapacity.
Notably, the bulk of the wealth of Chinese households is tied up in the real estate sector which is under massive stress. This is prompting Chinese consumers to hold back on their purchases.
Chinese real estate shares jumped on the reports of the government providing stimulus to the sector. Incidentally, in the past Chinese President Xi Jinping has spoken against speculation in the housing sector. He also clamped down on the tech sector but the government has since taken a much more conciliatory stance amid the worsening slowdown.
Meanwhile, while the country has announced several measures to revive the housing sector, they are yet to show a meaningful impact. The stress from the housing sector is also taking a toll on China’s banking sector.
China’s National People’s Congress meeting is scheduled for March
National People’s Congress meeting is set to be held in March where the country will announce the growth targets for 2025. With China’s economy widely expected to slow down even further this year, the country might need to come up with more stimulus measures, especially with Trump set to become the 47th US president.
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Mohit Oberoi
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