"China's Economic Congress: Reviving Growth Amid Uncertainty"

As China concludes its annual Congress, the world's second-largest economy finds itself at a critical juncture. The country's GDP grew by 5 percent in 2024, meeting its annual target, but the path to sustained growth remains fraught with challenges. The Congress has left many questions open about how to revive a slowing economy, particularly in the face of global trade tensions and domestic structural issues.

The economic landscape of 2024 was marked by a V-shaped trajectory, with the first three quarters showing a weakening of economic prosperity. However, a package of pro-economic growth policies rolled out since September has led to positive changes in many areas. The fourth quarter saw a 5.4 percent year-on-year growth, the highest quarterly growth of the year, driven by incremental policies that shored up domestic consumption and lifted market expectations.

Despite these positive signs, the foundation for economic recovery remains fragile. Foreign demand has not been strong enough to compensate for insufficient domestic demand, and the boom in emerging industries has not been adequate to offset the drag from traditional sectors. The pains of structural and cyclic economic transformation are still evident. Initial estimates put the annual GDP growth at around 5 percent, but the road ahead is uncertain.

One of the key challenges facing China is the potential tariff adjustments by the U.S. under Donald Trump's administration. It is assumed that the U.S. will increase effective tariffs on Chinese goods by 15 percentage points in 2025 and by an additional 10 percentage points in 2026. This would result in a cumulative increase higher than the 11 percentage points seen in 2018-19. The direct impact of these tariffs on China's exports is expected to be similar to that experienced during the 2018-19 trade tensions. However, the indirect effects on business confidence and capital expenditure could be more moderate. This is because both domestic and foreign enterprises have reallocated their global supply chains over the past seven years, making them better equipped to handle trade frictions. Additionally, the share of U.S. imports from China has decreased from 19% in 2017 to 15% currently, which may further mitigate the impact. Despite these adjustments, the export sector will face more headwinds, weakening its support for economic growth. The growth of global trade is expected to be generally stable, but China's exports to major economies may diverge. Furthermore, global trade protectionism is likely to intensify, adding to the challenges faced by China's export-driven sectors.

To address these challenges, China is implementing several key structural reforms and policy initiatives. These include the consumer goods trade-in policy, which is expected to further unleash its role in boosting domestic consumption. The potential of service consumption is likely to be further unleashed, including sectors such as healthcare, education, and cultural tourism. Falling interest rates on existing housing loans will ease the pressure of repayment on residents, improve residents’ cash flows, and unleash certain consumption potential. This measure is aimed at stabilizing the real estate market, which has been a significant contributor to economic growth in the past.

The combination of manufacturing and infrastructure investments will contribute greater to economic growth. The recovery of domestic demand, combined with further release of the effects of large-scale equipment renewals, will boost increases in both quantity and quality of manufacturing investment. Infrastructure investment will grow faster, contributing greater to economic growth. Industrial production will grow steadily, with new drivers playing an increasingly important role. The optimization of the supply structure of emerging industries will speed up, with new drivers likely to be further unleashed. This includes sectors such as artificial intelligence, green technologies, and high-end manufacturing, which are expected to drive long-term economic growth.

China plans to implement extraordinary fiscal measures, including increasing the fiscal deficit ratio to between 3.5 and 4 percent, issuing ultra-long-term special treasury bonds and special-purpose bonds, and focusing on supporting infrastructure, manufacturing technology transformation, and New Quality Productive Forces (NQPFs). On the monetary side, policies will shift toward “moderate easing,” with anticipated interest rate cuts and reserve requirement ratio reductions to ease financing pressures on businesses. Domestic demand policies will be more proactive, integrating a range of measures to promote consumption and stabilize the economy. This includes enhancing mechanisms for consumption growth and continuing to expand sectors like cultural tourism and healthcare.

The Congress has left many questions open about how to revive a slowing economy, but the policy initiatives and structural reforms being implemented by China are aimed at addressing the imbalance between supply and demand, promoting high-quality economic development, and ensuring long-term economic stability. By focusing on domestic consumption, manufacturing, and infrastructure investments, China is positioning itself to navigate the challenges of a complex global environment and achieve sustainable economic growth. The world must choose: cooperation or collapse.